Many mortgage lenders use automated systems to approve borrowers for a loan. It’s a quick process that gives lenders the answer they need right away. This only pertains to borrowers that have straightforward credit and simple income. Sometimes things are more complicated and the computer cannot determine what type of risk you pose to a lender. The program may provide the lender with a ‘Refer’ decision in underwriting. This doesn’t mean that they approve or deny the loan. Instead, they refer it to the lender how must do a manual underwrite on the loan.
Manual Underwriting Defined
As the name suggests, manual underwriting is done by hand. An underwriter looks at the loan qualifications one by one. He doesn’t enter the information into a computer. Instead, he determines himself what type of risk you pose.
The underwriter may ask for different documents or ask more questions than you might receive if the lender was able to go the automated way of underwriting your loan. It’s almost an opinionated way to underwrite your loan.
What you Need for a Manual Underwrite
What will help you get approved with a manual underwrite? What you will need exactly depends on the situation at hand.
No matter the reason that you are referred for a manual underwrite, you are going to need to show that you are a good risk. For example, a common reason borrowers are referred is for a low credit score or not enough credit. If this is the case you will have to show the lender in other ways that you are a good risk. The ways you may show that you are a good risk include:
- Low debt ratio – If you are trying to get a lender to approve you without traditional credit, you want to show that you are in good financial position. Having a low debt ratio is the best way to do this. It’s not so much about how much money you make, but about how much debt you have outstanding. The less debt you have outstanding, the better your chances of approval.
- Large down payment – The more money you can put down on your home, the better your chances of approval become. Lenders want to know that you are investing your own money on the home, rather than just borrowing most of it from the lender. The lender will look at your loan-to-value ratio to determine just how much you have invested yourself. The lower your LTV, the higher your chances of approval become.
- Low payment shock – If you are renting, or you had a mortgage on another home, you want your new mortgage to be around the same amount. If you have too much payment shock, or a payment increase, it can make a lender nervous about your risk of default.
- Part-time or bonus income – Sometimes automated underwriting cannot understand income that isn’t consistent or that you haven’t had for a long time. With manual underwriting, though, the underwriter can understand your part-time or bonus income and may be able to include it in your income to help you qualify for the loan.
Be prepared to answer a lot of questions and provide a lot of paperwork with a manual underwrite. It helps the lender figure out if you are a good risk. Even though it seems tedious, it will help you get the loan in the end. The more positive factors and explanations you can provide a lender, the better your chances of approval even if the automated system turned your application down.Click to See the Latest Mortgage Rates»