Mortgage and Portfolio Loan Guide

what is manual underwriting

What is Manual Underwriting Mortgage?

If you have been told you do not qualify for an FHA or VA loan, but were not given a reason, a manual underwriting mortgage may be your ticket to getting approved.

What is a manual underwriting mortgage?

Traditional mortgage loans have two ways of getting approved: automated underwriting and manual underwriting. When the loan is manually underwritten, the scenario is evaluated with a more fine tooth comb than automated underwrite to ensure the borrower meets required guidelines. A manual underwritten mortgage is often a deal saver if the loan doesn’t receive an automated approval.

Automated approval vs. Manual Approval

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Mortgage lenders use a “desktop underwriting” system where the mortgage application is imported and then sent to get “automated findings”. Based on the application data (income, credit, assets, property) the desktop underwriter (automated approval) with give:

  • Approve/Eligible
  • Approve/Ineligible
  • Refer/Eligible
  • Refer with caution

Approve/Eligible means based on the application submitted, the borrower appears to meet minimum guidelines for the mortgage they are applying for. If approve/eligible findings are received there is high confidence the loan will be approved assuming the application is correct and all income/credit/asset/property can be verified per requirements on the automated findings. Lenders are not required to share the findings.

Approve/Ineligible findings in my opinion are most commonly found when there are not enough assets for funds to close (down payment, costs, escrows, and reserves) or the length of time employed or housing history is incomplete.

Refer/Eligible means the borrower appears to meet minimum guidelines, but the loan needs to be manually underwritten in order to confirm that is the case.

Refer with caution means there appears to be significant risks with the loan, and the applicant most likely does not meet minimum underwriting standards for the loan they are applying for.

When referring to a “manually underwriting mortgage” the findings with the automated underwrite would be Refer/Eligible.

The problem with manual underwriting mortgage:

Many lenders do not do manual underwriting.

Why?

Because like I mentioned above, with a manual underwrite the loan needs to be underwritten with more of a fine tooth comb which means it slows underwriters down. The guidelines on manually underwritten mortgages are more strict than automated underwritten loans as well.

Many lenders tend to chose a path of least resistance, and only allow automated underwriting to be done. This leaves many borrowers left with a denial letter and no direction as to what to do.

The good news is that there are plenty of lenders who do offer manually underwritten mortgages.

If you have been told that you do not qualify for a mortgage, ask specifically: “What is causing me to not be approved?”

If you can clearly understand the reason for denial, you know what questions to ask if you end up pursuing approval with a different lender.

Perhaps the reason for denial is that your application received Refer/Eligible findings, and the lender you’re working with just doesn’t allow a manual underwrite to be completed.

Manual Downgrade

In some cases, even if the loan received Approve/Eligible findings, the loan has to be “downgraded” and be manually underwritten.

Here is the most comprehensive available list for manual downgrade scenarios:

The Mortgagee (Lender)  must downgrade and manually underwrite any Mortgage that received an Accept recommendation if: 

  • the mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard;
  • additional information, not considered in the Automated Underwriting System (AUS) recommendation affects the overall insurability of the Mortgage;
  • the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts;
  • the date of the Borrower’s bankruptcy discharge as reflected on bankruptcy documents is within two years from the date of case number assignment;
  • the case number assignment date is within three years of the date of the transfer of title through a Pre-Foreclosure Sale (Short Sale);
  • case number assignment date is within three years of the date of the transfer of title through a foreclosure sale;
  • the case number assignment date is within three years of the date of the transfer of title through a Deed-in-Lieu (DIL) of foreclosure;
  • the Mortgage Payment history, for any Mortgage trade line reported on the credit report used to score the application, requires a downgrade as defined in Handbook 4000.1 II.A.4.b.iii (K) – Housing Obligations/Mortgage Payment History;
  • the Borrower has undisclosed mortgage debt that requires a downgrade; or
  • business income shows a greater than 20 percent decline over the analysis period.

 
If a determination is made that the Mortgage must be downgraded to manual underwriting, the Mortgagee must cease its use of the AUS and comply with all requirements for manual underwriting when underwriting a downgraded Mortgage.
 
For additional information see Handbook 4000.1 II.A.4.a.v.–vi. available here

What to expect if your loan is being manually underwritten?

Take a breath and prepare yourself. You’re going to need to be patient because your loan process is going to be slightly more complicated than an automated underwrite.

You’ll need to provide more documentation, and you’ll likely need to provide a few more letters of explanation to your lender.

The bit of extra work that it takes to get a loan approved with a manual underwrite is worth it. The approval is worth the work. The alternative is not doing the work, no approval, and no loan.

What if you’ve tried getting manual underwriting mortgage, and were still denied?

A portfolio loan may be your solution.

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Portfolio loans are mortgage options that work outside the “normal” lending guidelines. These loans are perfect for borrowers who don’t quite fit within the traditional mortgage requirements.

Examples of when portfolio loans are done:

Ending thoughts…

Just because one lender tells you that you do not qualify for a mortgage, that does not necessarily mean there aren’t any options for you.

Whether you get a manually underwritten mortgage or a portfolio loan, the extra effort is probably worth it. At the very least, you’ll have a 2nd opinion, and have clear understanding of what you do need to accomplish in order to qualify in the future.

 


 

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