When you apply for a mortgage loan, the bank or lender has to go through the process of underwriting the loan. This means that your financial data will be verified and analyzed to determine if you qualify for the loan and at what terms. Today most of this process is automated but it can still be done manually and, in some cases, may be more helpful to your application.
What is Underwriting?
Underwriting involves the lender collecting information on your income, assets, debt, and the condition and details about the property you intend to buy. All the data is run through the lenders’ special formulas to see if you meet all the requirements for a home loan. If you pass the test, your loan is approved and you receive funding; if not, your loan application is denied, and the home sale might fall through.
Manual vs. Automated
Automated underwriting makes use of technology to plug your data into eligibility algorithms. Computers can analyze your data much faster and more efficiently than a person can. Manual underwriting means the work of verifying and analyzing your financial data is done by a human being. Computers are good for standard situations, but humans are able to make trickier judgment calls when there are special circumstances. This is especially true if you are self-employed, do seasonal work or are applying for a jumbo loan.
What Documents Do Manual Underwriters Examine?
Manual underwriters need data that tells them about your income, assets, debt, and potential property. They use the following documents for this process:
- One years’ worth of bank statements
- Two or more years' worth of tax returns
- Pay stubs or self-employment proof of income
- Proof of ownership for assets like vehicles or other properties
- Statements from retirement or brokerage accounts
What Types of Mortgages Are Eligible for Manual Underwriting?
- Conventional Loans
- Conforming – These mortgages qualify for Fannie Mae and Freddie Mac. You can request a manual underwriting, but lenders are under no obligation to comply.
- Non-Conforming – These are loans that do not fit the Fannie and Freddie requirements, including jumbo loans. Manual underwriting is more common in this category because they are by definition loans with special conditions.
- Government-Insured Mortgages
- FHA – These loans backed by the Federal Housing Administration will automatically receive a manual underwriting process if you have a credit score lower than 620 and a debt-to-income ratio greater than 43%.
- VA – Guaranteed by the Department of Veterans Affairs, VA loans are already extremely flexible but there are still opportunities for manual review. For example, if you have had a foreclosure, bankruptcy, recent late payments, or delinquency on a federal debt, the need for a human underwriting is likely necessary. You may also need this type if you do not have much of a credit history.
- USDA – Designed for those purchasing in rural areas, these loans backed by the Department of Agriculture are quite lenient when it comes to credit score and down payment, but if your application does not pass the automated underwriting, it may then be manually underwritten if the lender agrees.
If you are concerned about being denied for a home loan due to special circumstances, requesting a manual underwriter may help you get the mortgage green light you need.