Skip to content

Posted almost 10 years ago

What is a "manual underwrite" mortgage loan?

What is a "manual underwrite" mortgage loan and what is needed to get these types of mortgages approved?

It's important for both borrowers and lenders to realize what it means when a mortgage loan officer states that a loan requires a "manual underwrite". Sometimes even mortgage lenders don't completely understand what it entails, so let's start off with the basic definition of what a manual underwrite actually means when it's applied for mortgage underwriting.

The vast majority of lenders use "automated underwriting systems" (AUS) to help them correctly underwrite mortgage loans. These complex software systems were developed by Fannie Mae, Freddie Mac, and USDA. The software systems developed by Fannie and Freddie are used for conventional conforming loans, FHA loans, and VA loans. The USDA software system is specifically used for "Rural Housing" (sometimes referred to as "USDA") loans. So here is the process:

A lender will upload (or manually enter) all loan application data and a credit report into the appropriate software system and then "submit" the loan. After about 30 seconds, the software system will provide a response. First of all, the response must state that the loan is "eligible" (for "delivery to Fannie Mae or Freddie Mac -- on conventional loans, for "FHA insurance", for the "VA guarantee", or for the "Rural Housing / USDA guarantee". If the loan is ineligible, then it can't be done and the buyer / borrower will probably need to find some type of non-conforming (portfolio or hard money) type of loan. Assuming the loan is "Eligible", then there is a second response that indicates the level of underwriting "scrutiny" required. This response will either state "Approve", "Accept", or "Refer". Here are some examples of the most common three possible responses for an ELIGIBLE loan:

  1. "Approve/Eligible"
  2. "Accept/Eligible"
  3. "Refer/Eligible"

Response #3 "Refer/Eligible" is what will trigger ANY lender to need to perform a manual underwrite. Many lenders do not even offer the service of performing manual underwrites because they require additional work and are more prone to audits by Fannie Mae, Freddie Mac, or Ginnie Mae. Many lenders do offer manual underwrites, but most of them prefer to only offer this service on government loans (FHA, VA, or USDA). This simply means that very few lenders will offer a manual underwrite on a conforming conventional loan. Check with your mortgage loan officer to determine if your loan will require a manual underwrite, if they can still potentially approve the loan as a manual underwrite, and what stipulations are triggered upon a manual underwrite (such as pricing adjustments to the interest rate and/or closing costs).

Now we will dig into what is most likely going to be required if your loan is going to be manually underwritten. The "Refer" part of the software response simply means that a human being must manually "refer" to the entire guideline handbook (depending on the type of loan) to "manually" make sure it meets all guidelines, which obviously requires more time and scrutiny. Here is a list of documentation and guideline requirements that a manual underwrite will typically trigger:

  1. Proof of timely rent payments for the past 12 consecutive months. If you pay by check, then the loan officer will ask for images of cancelled rent checks (front and back) for the past 12 months of rent payments. If you pay by automatic withdrawal then the loan officer will ask for the past 12 monthly bank statements that show the dates of each rent withdrawal. In addition, lenders may even have a 3rd party call the landlord or property management company to verbally verify timely payment history as an extra layer of proof (especially in cases where people pay by check but there are significant lags between the check date and the deposit post date).
  2. Elaborate explanations regarding any and all derogatory credit accounts, bankruptcies, or foreclosures. Effort COUNTS on such letters, so don't try to cut any corners. Put some time into these letters, proofread them, and the "effort factor" WILL count for something. Typically a manual underwrite is a result of a poor credit history, so this will most likely apply to you if you are facing a manual underwrite.
  3. Compensating factors. These are simply "good things to offset bad things" in your loan file. Some of the best compensating factors are:
    • Reserves. This is simply money that you'll have left over after buying or refinancing a home. The best types of reserves are the most liquid (checking, savings, money market accounts). Reserves can also be retirement accounts, stocks, bonds, etc. but you'll need to prove that you can actually access the money in such accounts (often a 401(k) will have a handbook that stipulates when and how much money any employee can actually withdrawal or borrow from the account-- the loan officer will need this handbook if you want to be able to "count" a 401(k) account).
    • Down payment. Lenders love to see that you have skin on the game. For FHA loans, the minimum down payment is typically 3.5%. If you can put down 10% then not only would this be considered a HUGE "compensating factor", but also there are multiple benefits regarding when you can cancel FHA mortgage insurance if you put down 10%.
    • Payment shock. Whether you rent or own right now, if you can prove that you've been capable of making such a payment on time for the past 12 months AND the new proposed payment is not much larger than your current monthly housing payment, then this is a HUGE compensating factor because it proves that you've been capable of handling this payment range over the past 12 months without being late. Here is a trick to "count" this as a compensating factor EVEN IF your new proposed monthly payment will be significantly higher: Take a look installment loans such as auto loans. If, perhaps, your new housing payment was going to increase from $700 in rent to $1,100 per month for the mortgage and you have a $400 monthly car payment that is almost paid off, then point that out! Essentially, you have proven that between the rent and the vehicle loan, you've been paying $1,100 on time each month, and if that vehicle payment only has a few months left then there is no reason that the (now paid off) vehicle shouldn't allow you to now handle the $400 increase in your housing payment. This is something that often loan officers even forget to analyze and point out.
    • Income that can not be "counted" for underwriting purposes.There is typically income that can't be "counted" for underwriting purposes, but may be considered a "compensating factor". Examples of such income can include child support or alimony that is received, but not always on time or for the full amount ordered by the judge, non-borrowing spouse income (a spouse that is not on the loan, but has a job), income from a second job (typically you can't "count" income from a second job unless you've had it for at least two years), or self-employed income that has not been received for two years. Use your imagination to come up with additional compensating factors after reading these examples.
    • Job stability and /or likelihood for future wage increases.Mortgage lenders love it when employees have worked for the same employer for a long time, as they generally much less likely to be fired or laid off and more likely to receive raises. Additionally, mortgage underwriters actually consider the company and industry that your employer is in. A small independent medical insurance brokerage is less likely to be in business and retaining their employees than a company that's made the Dow 30 index (such as Boing, General Electric, AT&T, etc.).
  4. Additional "non-traditional" credit accounts to be added to the credit report. If the borrower has less than three accounts with a 12 month history of timely payments, then many underwriters will require that the borrower document timely payments on other bills. The best types of accounts are "housing-related accounts", such as utilities, renters insurance, cable TV, internet, etc. Other acceptable accounts can include auto or home insurance payments, mobile phone, storage unit, etc.The idea is to gather more data to determine a given borrower's willingness / ability to make timely payments. Again, this only applies to borrowers that have very few accounts that show up on their credit reports.

Keep in mind that if you are facing a manual underwrite, it's usually due to poor credit or a high debt-to-income ratio. Most lenders will want to see a housing ratio (mortgage payment + mortgage insurance + home insurance + property taxes + homeowners association dues on a monthly basis) / (gross monthly income) around 31% and your debt-to-income ratio ("DTI") at 43% or less (this is the same calculation except your "debt" includes all other payments such as minimum credit card payments, auto loans, personal loans, child support due, etc.). Many lenders that offer manual underwrite loans will not budge on these ratios, but some will. Generally, with compensating factors, you can get a manual underwrite loan approved with a housing ratio of up to 35% and a DTI ratio of up to 48% at the most, and these lenders are tough to find.

Of course, we highly recommend visiting (or sending your buyer) to www.RateBid.comto "locate" such lenders. The borrower will stay anonymous, the form takes about 30 seconds to complete, and the borrower would definitely want to include in the optional "Description/Comments" box what their "challenge" is (are they facing a manual underwrite? Is this a manual underwrite with a DTI of 45% and current lender can't approve? My "compensating factors" are_______ , etc."). The more detailed, the better. All registered lenders across the country are presented with this data and then can determine if this is a type of loan that they could possibly approve. They then "bid" their rates, closing costs, and the corresponding monthly payment. There are even portfolio and "hard money" lenders that are registered on Ultimately, this allows the borrowers to "zero in" on the lenders that not only believe they could approve a given scenario, but also which ones can offer the best terms. Borrowers never receive a sales call because they remain anonymous. They simply review each loan officer's profile, which includes all contact and company information, a biography, and a feedback rating and then decide which mortgage lender(s) to contact to proceed with more questions and / or complete a loan application.

Comments (6)

  1. Initially my loan was approved,  My loan agent did a restructure of the loan to include seller covering the closing costs, ( an error made by the realtor in the beginning) it was a $5000 difference. Now it has come back as refer/ eligible. This is an FHA loan. I'm in a panic as to what this means.

  2. Wow!!! This is amazing! Just what I needed. Thanks @Blake Alexander

  3. very informative!!!! thanks!