How Manual Underwriting Works and Why You Need It

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

Mortgage lenders like things to be easy. If you're lucky enough to have a high credit score and plenty of income, lenders can process your loan application relatively quickly. But not everybody lives in that world.

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 slightly more cumbersome, but it's a solution for borrowers who don't fit the standard mold.

What Is Manual Underwriting?

Manual underwriting is a manual process (as opposed to an automated process) of evaluating your ability to repay a loan. Your lender assigns a person to review your application and supporting documents that demonstrate your ability to repay the loan (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

Automated systems are responsible for much of the decision-making when it comes to home loans. If you meet specific criteria, the loan is 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 easy 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 spits out an approval. But if anything is amiss, your loan will receive a “Refer” recommendation, and it must be reviewed outside of the AUS.

What factors might derail your application?

Debt-free lifestyle: The key to high credit scores is a history of borrowing and repaying loans. But some people choose to live without debt, which can bring simplicity and significant interest savings. Unfortunately, your credit eventually evaporates along with your interest costs. You don’t necessarily have bad credit—you have no credit profile 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 or thin credit can be better than numerous negative items (like bankruptcy or collections) 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. Adding a home loan to your credit reports may accelerate the process of building credit. Automated underwriting can help you add to the mix of loans in your credit files.

Recent financial problems: Getting a loan after bankruptcy or foreclosure isn’t impossible. Under certain HUD programs, you can get approved within a year or two—without manual underwriting. But manual underwriting provides another option for borrowing, especially if your financial difficulties are relatively recent. 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 in some cases, a higher debt to income ratio makes sense. With manual underwriting, you might get approved with a higher-than-usual ratio. In many cases, that means you have more options available in expensive housing markets. Just beware of stretching too much and buying an expensive property that’ll leave you “house poor.”

How to Get Approved

If you don’t have the standard credit rating or income profile to get approved, what factors can help your application? You need to use whatever you have available to show that you’re willing and able to repay the loan. To do so, you truly need to be able to afford the loan. In other words, you need sufficient income, assets, or some other way to prove that you can handle the payments.

In manual underwriting, somebody takes a very close look at your finances, and the process can be frustrating and time-consuming. Before you start, make sure you really need to go through the process—see if you can get approved without manual underwriting. 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: Be prepared to prove that you’ve been making other payments on-time over the past year. Traditional credit reports show your loan payment history (among other things), but you need to demonstrate the same payment behavior using different sources. Large payments like rent and other housing payments are best, but utilities, memberships, and insurance premiums can also be helpful. Ideally, 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, minimizes your monthly payment, and it gives lenders a buffer. If the lender needs to take your home in foreclosure, they’re less likely to lose money when you make a significant 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 down payment money, read more about using and saving for a down payment.

Debt-to-income ratios: Approval is always easier with low ratios. That said, you can potentially use manual underwriting to get approved 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 loan originator that does. Your lender also needs to work with the specific government program you’re looking at. If you get a “no,” there might be somebody else out there.

Cash reserves: A significant down payment may drain your bank account, but it’s wise to have extra reserves on hand. Reserves can help you get approved. Lenders want to be comfortable that you can absorb minor surprises like a failing water heater or unexpected out-of-pocket medical expenses.

Compensating Factors

“Compensating factors” make your application more attractive, and they might be required for approval. These are specific guidelines defined by lenders or loan programs, and each one you meet improves your chances. 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 may 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 debtbut 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. But with manual underwriting, you might be able to use that extra 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. Unfortunately, that 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 need the standard 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 lender denies your application. Your real estate agent can explain your options to you. Especially in hot markets, you may be less attractive as a buyer if you require manual underwriting.

    Explore alternatives: If manual underwriting does is not successful for you, there may be other ways to get housing. Hard money lenders might be a temporary solution while you build credit or wait 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 decide that it just makes more sense to rent until you can get approved.