Underwriting & credit
Manual Underwriting: Definition & Example
What Is Manual Underwriting?
Manual underwriting is when a human underwriter evaluates a loan application directly, rather than relying on an automated underwriting system, usually for borrowers with limited or unusual credit.
What does manual underwriting mean?
Most mortgages first go through an automated underwriting system, such as Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Product Advisor. When the system cannot approve a file, often because of no credit score, a past bankruptcy, or non-traditional credit, some loan programs allow a person to underwrite it by hand.
Manual underwriting usually has stricter ratio limits and heavier documentation. Underwriters may look at 12 months of rent payments, utility and insurance payment history, reserves, and other compensating factors.
FHA, VA, and USDA loans are the most common programs that allow manual underwriting. Many conventional lenders do not offer it.
Manual underwriting example
A borrower has no credit score because he has always paid cash. His FHA lender manually underwrites the loan using 12 months of on-time rent payments verified by the landlord, utility and phone payment history, and three months of reserves. The debt-to-income ratio must stay within the tighter manual limits.
Related terms
- UnderwritingUnderwriting is the process a lender, insurer, or landlord uses to evaluate the risk of an applicant and decide whether to approve them, and on what terms.
- Compensating FactorsCompensating factors are strengths in an application, such as large savings, long job history, or low payment shock, that can offset a weakness like a high debt-to-income ratio or thin credit.
- Thin Credit FileA thin credit file is a credit report with too few accounts or too little history to generate a reliable credit score. People with no credit record at all are called credit invisible.
- Alternative DataAlternative data is information used to evaluate applicants that is not in a traditional credit report, such as bank account cash flow, rent and utility payments, and employment or education records.
- Verification of RentVerification of rent (VOR) is confirmation from a current or previous landlord of an applicant’s tenancy dates, rent amount, and payment history.
