Loans have always been underwritten manually, also referred to as a “manual underwrite”. But it’s important to be clear on what the term means to our underwriters and what the impact can be on your loan application.
Manual Underwrite: What is It
Historically when a borrower applied for a home loan we would ask to document the application. This documentation included pay check stubs, W2 forms, bank statements and other information. For self-employed borrowers two years of income tax returns were required along with a profit and loss statement for the business. A credit report was pulled and included in the file and an appraisal was ordered. All of this was done before the loan ever went in front of the underwriter. The manual underwrite means the underwriter’s job is to make sure the loan file and accompanying documentation meets proper lending guidelines. The underwriter would physically review each item and make sure it fit program requirements. The credit report was carefully reviewed line item by line item looking for any late payments. The appraisal report was also meticulously evaluated. Once the loan met these requirements, loan papers could be drawn. A manual underwrite means the underwriter approves the loan in detail without using automated underwriting tools.
How it Works
Okay, now fast forward to today. When you submit a loan file I’ll first review it to make sure it’s complete, pull a credit report and credit scores and then submit it to an online automated underwriting system. Within a few moments, I will have the initial loan approval that provides me with a checklist of items needed to close the loan. Instead of fully documenting the application upfront like we did before automated underwriting, the loan is first submitted for an initial approval and documented per the “findings” listed in the approval. It’s a fairly streamlined process and cuts down on much of the documentation needed to close a loan application. That’s why in some cases I can have your loan approved in as little as two weeks, not 30 days.
But sometimes we don’t get the initial approval we want. Instead, the answer we get is “refer/eligible.” What does that phrase mean? It means the submitted application may still be eligible for sale in the secondary markets but it can’t be submitted electronically and must be approved manually. A manual underwrite means the underwriter approves the loan in the same way it was done prior to automated underwriting was introduced.
When we’re notified that a loan isn’t eligible for an electronic submission, it’s usually because there is a recent bankruptcy listed in the file. When there is a bankruptcy noted in a credit report, it can trigger the requirement for a manual approval automatically. A manual underwrite can also be needed when there are no credit scores in the file because the buyers have little to no credit history but can still qualify for a home loan based upon other aspects of their application such as an acceptable credit history, timely utility payments and other positive factors that wouldn’t show up in a credit report.
When someone is informed that a manual underwrite is necessary, that doesn’t mean the file is denied. All it typically means is the loan will be evaluated in a different manner and there might be a bit more time involved, but a manual underwrite requirement isn’t necessarily a negative. It’s just a different way to achieve your goals.