Credit scores have traditionally been a go-to metric for measuring a borrower’s creditworthiness across the mortgage lending industry. But not all prospective homeowners have a standard credit history. If you have no credit score it can seem like an impossible task to get a mortgage. Luckily, manual underwriting provides a path for these borrowers. This enables lenders to provide credit based on other measures of an applicant’s financial responsibility, making homeownership possible without traditional credit scores.
What is Manual Underwriting?
Manual underwriting is a careful process in which an underwriter from the loan’s lender reviews a potential borrower’s financial profile to establish whether they qualify for a mortgage. Whereas automated systems rely heavily on credit scores, manual underwriting looks deeper into the applicant’s financial situation. This holistic assessment is especially useful for:
- No credit history as they have opted for a debt-free lifestyle
- Are new to credit with no credit score established yet.
- Have a short credit history or “thin” credit file.
This process allows for a more tailored review of an individual’s finances, leading to a more personalized assessment of risk based on alternative indicators including income level and savings status.
Types of Loans That Allow Manual Underwriting
There are several types of loans that can accommodate borrowers who need manual underwriting, including:
1. ITIN Loans
An ITIN (Individual Taxpayer Identification Number) loan is for non–U. S. residents without an SSN but with a valid ITIN. Alternative forms of credit, such as rent, utility bills, and other recurring bills are generally used to qualify for these loans.
2. FHA Loans
For borrowers that do not meet standard AUS requirements, the Federal Housing Administration (FHA) permits manual underwriting. FHA manual underwriting takes compensating factors into account as well, such as strong rental history, low debt-to-income ratios, and large cash reserves. FHA loans are processed through both Desktop Underwriter (DU) and Loan Prospector (LP).
3. VA Loans
VA loans, guaranteed by the U.S. Department of Veterans Affairs, do permit manual underwriting, too. Veterans, active-duty members and eligible spouses who don’t already have a credit score can qualify by proving they have a record of timely payments for rent, utilities or other bills. DU and LP are also used for automated underwriting of VA loans, but manual underwriting may be required for borrowers who fall outside AUS guidelines.
4. Conventional VA Loans
Even though VA loans typically have more flexible requirements, conventional VA loans can also be subject to manual underwriting if an applicant does not have enough credit history. In order to evaluate financial stability, lenders might demand records for additional credit channels.
Automated Underwriting vs. Manual Underwriting
Automated Underwriting Systems (AUS): Desktop Underwriter (DU) & Loan Prospector (LP)
DU (Desktop Underwriter) and LP (Loan Prospector) are both automated underwriting systems used by lenders to evaluate loan applications. They operate by comparing a borrower’s financial information to predetermined guidelines:
- DU (Desktop Underwriter): Governed by Fannie Mae and provides an approval signal of “Approve/Eligible.”
- LP (Loan Prospector): Governed by Freddie Mac and provides an approval signal of “Accept.”
Both systems review critical loan elements, like credit scores, debt-to-income (DTI) ratios and financial documentation, to assess eligibility. However, if DU or LP say manual underwriting is required, a human underwriter must perform a more thorough review because of a complex financial situation.
Key Components Evaluated in Manual Underwriting
If an automated system flags for manual underwriting, underwriters look to other considerations in evaluating creditworthiness:
- Based on his income and employment stability: Proof of income including pay stubs, tax returns and employment history are assessed to find out even a borrower has a consistent income source.
- Housing Payment History : paying rent on time can be a substitute for credit. They might ask for bank statements or landlord verification.
- Utility and Service Payments: Regular payments for utilities, cellphone bills and insurance premiums can supplement an application.
- Savings and Portfolio Building: Having a good savings history can show that you are responsible with money.
- Debt-to-Income Ratio (DTI): A low DTI indicates good financial responsibility.
The Manual Underwriting Process
- Application submission: The borrower submits an application and supporting documents.
- AUS Review: Loan processed If a manual underwriting is needed, the lender proceeds to a detailed evaluation.
- In-Depth Review : Financial data is manually screened by an Underwriter and alternative credit data sources considered.
- Verification of References: They may call your landlord, employer or a utility provider.
- Compensating Factors: Some factors that may be considered if financial metrics are poor: larger down payments, cash reserves, etc.
- Final Decision: The lender makes an approval or denial decision after a complete review.
Pros and Cons of Manual Underwriting
Benefits:
- Inclusivity: Accommodates borrowers without traditional credit histories.
- Personalized Assessment: Evaluates financial behavior beyond just credit scores.
- Flexibility: Allows for compensating factors and alternative financial documentation.
Considerations:
- Documentation Intensive: Requires additional paperwork.
- Longer Processing Time: Takes longer due to detailed review.
- Potentially Stricter Terms: May require a higher down payment or reserves.
Getting Ready for a Manual Underwrite
- Maintain Detailed Record of Rent, Utility and Financial Statements
- Provide Stability: Provide documentation of stable employment and residence history.
- Save More Money: The more cash you have, the better the chances of you being approved.
For example, if you have been unemployed for an extended time frame, which leads to inconsistencies on your pay stubs, communicate this clearly to the underwriter.
Conclusion
It is especially beneficial for borrowers who do not conform to traditional underwriting models. It facilitates homeownership for a much larger audience by utilizing other financial measures. By being aware of how automated underwriting systems such as DU and LP work and knowing the situations that will require manual underwriting, homebuyers can help themselves get ready for their mortgage experience.