What Is Manual Underwriting for a Mortgage?

Mortgage underwriting is a fundamental process lenders use to determine a borrower’s eligibility and risk before approving a home loan. While most mortgage applications today undergo automated reviews, manual underwriting offers a personalized evaluation for those whose financial profiles do not fit standard algorithms. This alternative allows for a deeper, human-centric understanding of a borrower’s financial narrative.

What is Manual Underwriting

Manual underwriting involves a human underwriter meticulously reviewing a mortgage application, distinguishing it from automated systems (AUS). AUS rely on complex algorithms to swiftly analyze borrower data, including credit scores, debt obligations, and income figures, against predefined guidelines. This computer-driven approach offers speed and consistency for straightforward financial histories.

In contrast, manual underwriting bypasses these rigid criteria, allowing an experienced professional to make a personalized assessment of a borrower’s financial situation and risk profile. The underwriter thoroughly examines various financial documents and circumstances, applying discretion and judgment that automated systems cannot. This human element enables a more flexible evaluation, particularly beneficial for individuals whose financial narratives are complex or non-traditional. Manual underwriting offers a viable pathway to mortgage approval for those who might otherwise face rejection from automated processes.

When Manual Underwriting is Used

Manual underwriting becomes necessary or is commonly employed in specific scenarios where a borrower’s financial picture does not align with automated system criteria. One frequent situation involves individuals with no credit history or a limited credit file, making it challenging for algorithms to generate a reliable credit score. This can include those who intentionally maintain a debt-free lifestyle, lacking traditional credit accounts.

Another common instance for manual review is for self-employed individuals or those with non-traditional or fluctuating income sources. Their income patterns may appear inconsistent to an automated system, necessitating a human underwriter to understand the full context of their earnings. For example, self-employed borrowers whose income has declined significantly, such as by more than 20% in the last 24 months, typically require a manual underwrite.

Manual underwriting is also often triggered by recent significant financial events, such as a bankruptcy discharge or foreclosure. If a borrower’s debt-to-income (DTI) ratio exceeds the typical limits set by automated systems, but they possess other compensating factors, manual underwriting can provide an opportunity for approval. An automated underwriting system’s “refer/eligible” decision will direct the application to a human underwriter for a detailed review.

How Manual Underwriting Works

During manual underwriting, a human underwriter undertakes an extensive review of the borrower’s financial standing to assess their risk and repayment capacity. This process involves a meticulous examination of income stability and verification. The underwriter typically requires federal tax returns for two or more years, along with recent pay stubs covering about 30 days. For self-employed individuals, this includes personal and business tax returns, as well as current profit and loss statements to establish a consistent income history. Employers may also directly contact employers to verify employment history, including any bonuses, overtime, or commissions that contribute to income.

Asset verification forms another crucial component of this review. Underwriters scrutinize bank statements, often requesting up to 12 months, to source funds for the down payment and closing costs, and to confirm the availability of financial reserves. Statements from investment accounts are also reviewed to verify liquid assets. If any portion of the down payment is gifted, a formal gift letter detailing the source and intent of these funds is required.

The underwriter also performs a thorough evaluation of the borrower’s credit history. This includes reviewing traditional credit reports for payment patterns and any past derogatory marks. Borrowers will likely need to provide written explanations for any credit anomalies or past financial issues. For those with limited or no traditional credit history, the underwriter will consider alternative credit data, such as consistent rent, utility, and insurance premium payments, often requiring 12 to 24 months of payment history to establish creditworthiness.

Debt-to-income (DTI) ratios are calculated, encompassing both the housing expense (front-end ratio) and total monthly debt obligations (back-end ratio). Manual underwriting often allows for higher DTI ratios than automated systems, especially when compensating factors are present. These compensating factors, which can strengthen an application, include significant cash reserves, a long and stable employment history, a substantial down payment, or a proven history of on-time payments despite existing debts. The underwriter’s final decision is a holistic assessment, weighing all these factors to determine the overall risk of the loan.

Preparing Your Application for Manual Underwriting

Preparing your application for manual underwriting requires meticulous attention to detail and comprehensive documentation. To establish income stability, gather your W-2 forms and federal tax returns (typically two years). Provide recent pay stubs (last 30 days) to demonstrate current earnings. If self-employed, submit two years of personal and business tax returns, alongside current profit and loss statements. Document any non-traditional income sources, such as consistent commissions or bonuses, with a history of their receipt.

For asset verification, collect bank statements (60 to 90 days, sometimes up to 12 months) for all accounts holding funds for your down payment, closing costs, and financial reserves. Include statements for investment accounts, such as retirement or brokerage funds, if these are part of your assets. If using gifted funds for your down payment, ensure a formal gift letter outlining the source and intent.

Regarding your credit and payment history, be ready to provide written explanations for any derogatory marks on your credit report. If you have a limited traditional credit history, gather proof of consistent payments for non-traditional credit sources, such as 12- to 24-month payment history for rent, utility bills, or insurance premiums. Organizing all these documents clearly and being prepared to promptly provide additional information or answer questions will facilitate the manual underwriting process.