Why You Might Need Manual Underwriting

How to Get a Loan With No FICO Score

Woman paying utility bills on tablet
Those bills you pay every month can help you get a mortgage. JGI/Jamie Grill / Getty Images

If you have thin credit, bad credit, or complicated earnings, computerized approval programs may be quick to decline your application. However, it’s still possible to get approved with manual underwriting. The process is more cumbersome, but it's an option for borrowers who don't fit the standard mold.

If you're lucky enough to have a high credit score and plenty of income, you'll see your loan application move relatively quickly.

But not everybody lives in that world.

How Manual Underwriting Works

Manual underwriting is a manual process (as opposed to an automated process) of evaluating your ability to repay a loan. Your lender will assign a person to review your application, including documents that support your ability to repay (such as bank statements, pay stubs, and more). If the underwriter determines that you can afford to repay the loan, you will be approved. 

Why You Might Need Manual Underwriting

Most home loans are approved more or less by a computer: if you meet certain criteria, the loan will be approved. For example, lenders are looking for credit scores above a certain level. If your score is too low, you’ll be declined. Likewise, lenders typically want to see debt to income ratios lower than 31/43. However, “income” may be hard to define, and your lender might not be able to count all of your income.

Computerized models are designed to work with the majority of borrowers and the loan programs they most often use.

These Automated Underwriting Systems (AUS) make it easier for lenders to process numerous loans while ensuring the loans meet guidelines for investors and regulators.

For example, FNMA and FHA loans (among others) require that mortgages fit a particular profile, and most people fit clearly in or outside of the box.

Also, lenders might have their own rules (or “overlays”) that are more restrictive than FHA requirements.

If all goes well, the computer will spit out an approval. But if anything is amiss, your loan will receive a “Refer” recommendation, and it’ll have to be reviewed outside of the AUS.

What might derail your application?

Debt-free lifestyle: The key to great credit scores is a history of borrowing and repaying loans. But some people choose to live without debt, which can be simpler and less-expensive. Unfortunately, your credit will eventually evaporate along with your interest costs. It’s not that you have bad credit – you have no credit at all (good or bad). Still, it’s possible to get a loan with no FICO score if you go through manual underwriting. In fact, having no credit can be better than having negative items like bankruptcy in your credit reports.

New to credit: ​​Building credit takes several years. If you’re still in that process, you may have to choose between waiting to buy and manual underwriting. With a home loan in your credit reports, you may accelerate the process of building credit because you’re adding to the mix of loans in your file.

Recent financial problems: Getting a loan after bankruptcy or foreclosure isn’t out of the question.

Under certain HUD programs, you can get approved within a year or two without manual underwriting. However, manual underwriting provides even more options to borrow, especially if your financial difficulties were relatively recent (but you’re back on your feet). Getting a conventional loan with a credit score below 640 (or even higher than that) is difficult, but manual underwriting might make it possible.

Low debt to income ratios: It’s wise to keep your spending low relative to your income, but are some cases when a higher debt to income ratio makes sense. With manual underwriting, you can go higher which often means you have more options available in local housing markets. Just beware of stretching too much and buying an expensive property that’ll leave you “house poor.”

How to Get Approved

Since you don’t have the standard credit rating or income profile to get approved, what factors help your application?

You’ll basically need to use whatever you can to show that you’re willing and able to repay the loan. To do so, you really need to be able to afford the loan you need sufficient income, assets, or some way to prove that you can handle the payments.

Somebody is going to take a very close look at your finances, and the process will be frustrating and time-consuming. Before you start, make sure you really need to go through the process (see if you can get approved with a conventional loan). Take an inventory of your finances so that you can discuss the requirements with your lender, and so that you get a head start on gathering the information they need.

History of payments: Can you show that you’ve been making other payments on-time over the past year? Credit reports look at your payment history (among other things), and you’ll need to show the same payment behavior using different sources. Larger payments like rent and other housing payments are best, but utilities, memberships, and insurance premiums can also be helpful. Ideally, you'll identify at least four payments that you’ve been making on-time for at least 12 months.

Healthy down payment: A down payment reduces your lender’s risk. It shows that you have skin in the game, and it gives them a buffer if they need to take your home in foreclosure, they’re less likely to lose money when you make a larger down payment. The more you put down the better, and 20 percent is often considered a good down payment (although you may be able to do less). With less than 20 percent, you may also have to pay private mortgage insurance (PMI), which only makes things more challenging for you and your lender. For tips on coming up with that money, read more about using and saving for a down payment.

Debt to income ratios: Approval is always easier with low ratios. That said, manual underwriting can be used to get approval with higher ratios possibly as high as 40/50, depending on your credit and other factors.

Government loan programs: your chances of approval are best with government loan programs. For example, FHA, VA, and USDA loans are less risky for lenders. Remember that not all lenders do manual underwriting, so you may need to shop around for a lender that does and that works with the specific government program you’re looking at. If you get a “no,” there might be somebody else out there.

Cash reserves: you’ll probably need to put down a large chunk of change as a down payment, but it’s wise to have extra reserves on hand and reserves can help you get approved. Lenders want to be comfortable that you can absorb minor surprises like a failing hot water heater or unexpected medical expense.

Compensating Factors

“Compensating factors” make your application more attractive, and they might be required. These are specific guidelines defined by lenders or loan programs, and each one you meet makes it easier to get approved. The tips above should work in your favor, and specifics for FHA manual underwriting are listed below.

Depending on your credit score and debt to income ratios, you might need to satisfy one or more of these requirements for FHA approval.

  • Reserves: Liquid assets that will cover your mortgage payments for at least three months. If you’re buying a larger property (three to four units), you’ll need enough for six months. ​Money you receive as a gift or loan cannot be counted as reserves.
  • Experience: Your payment (if approved) cannot exceed your current housing expense by the lesser of 5 percent of $100. The goal is to avoid dramatic increases (“payment shock”) or a monthly payment that you’re not accustomed to.
  • No discretionary debt: If you pay off all of your credit cards in full, you’re not really in debt but you’ve had the opportunity to rack up debt if you wanted to. Unfortunately, a completely debt-free lifestyle does not help you here.
  • Additional income: In some cases, automated underwriting cannot count overtime, seasonal earnings, and other items as part of your income. However, with manual underwriting, you might be able to show a higher income (as long as you can document the income and can expect it to continue).
  • Other factors: Depending on your loan, other factors might be helpful. In general, the idea is to show that the loan will not be a burden and you can afford to repay. Stability in your job never hurts, and more reserves than required can also make a difference.

Tips for the Process

Plan for a slow and time-consuming process. An actual person needs to go through the documents you provide and determine whether or not you qualify for the loan this takes time.

Lots of paperwork: Getting a mortgage always requires documentation. Manual underwriting requires even more. Expect to dig up every imaginable financial document, and keep copies of everything you submit (in case you need to re-submit). You’ll need the usual paystubs and bank statements, but you may also need to write or provide letters that explain your situation and help your underwriter verify the facts.

Homebuying process: If you’re making an offer, build in plenty of time for underwriting before closing. Include a financing contingency so that you can get your earnest money back if your application is declined (talk with your real estate agent to understand the options). Especially in hot markets, you may be less attractive as a buyer if you’re using manual underwriting.

Explore alternatives: If manual underwriting does not work for you, there may be other ways to get housing. Hard money lenders might be a temporary solution while you’re building credit or waiting for negative items to fall off your credit report. A private lender, co-borrower, or cosigner (when chosen responsibly) might also be an option. Finally, you may determine that it just makes more sense to rent until you’re able to get approved.