What Is Manual Underwriting?

When you apply for a mortgage or another kind of loan, it can feel like your entire financial life is under a microscope. Through a process called underwriting, the lender reviews factors such as your income and credit score to determine if you qualify for a loan.

If you have regular income, a decent cash reserve, minimal debt and a good credit score, the underwriting process may be no more traumatic than your regular teeth cleaning. If, however, your finances are not so fair or straightforward — such as if you have a recent black mark on your credit or your income isn’t as regular as bimonthly paychecks — the underwriting process could uncover the need for some fillings.

When your financial situation raises some red flags for lenders, it can be hard to qualify for a loan, especially if the lender simply enters your information into an automated system. In such cases, it can be helpful to have human eyes review your application through manual underwriting.

What Is Manual Underwriting?

Manual underwriting is when an individual underwriter reviews your application information to determine if you qualify for a loan. This underwriter is a highly skilled and trained professional who uses knowledge and instincts to determine if the loan can be approved, says Dan Holtz, founder and CEO of mortgage company Sovereign Lending Group.

“Manual underwriting can be helpful for those people who may lack in one area of their financial history but meet or exceed all the other qualifications,” says Vadim Verdyan, head of advice for personal finance app Albert.

For example, an automated underwriting process may reject you if you don’t meet the minimum credit score requirement built into its formula. “With manual underwriting, you have the opportunity to explain yourself and highlight other financial areas that may show that you are qualified for the loan despite having a lower score,” Verdyan says.

[Read: Best Mortgage Lenders.]

What’s the Difference Between Manual Underwriting and Automated Underwriting?

When a lender uses manual underwriting for a loan application, a human underwriter reviews it instead of an underwriting software program. Manual and automated underwriting can each evaluate factors such as the borrower’s credit history and income.

But with manual underwriting, the human underwriter can ask additional questions about any issues that come up in the analysis, Verdyan says. This may allow for a more holistic review of the application.

“That said, manual underwriting generally requires more time and documentation because a human reviews each line of the loan rather than a computer,” Verdyan says.

You may be able to switch to manual underwriting if you do not qualify with automated underwriting. “Depending on the guidelines for the specific type of loan you are trying to acquire, an automated underwrite may be more black and white and will let you know if it qualifies and if not, the reasons it doesn’t,” Holtz says. “Then it would be determined to see if the loan can be switched to a manual underwrite.”

[Read: Best Personal Loans.]

When Is Manual Underwriting Used?

Mortgage lenders can generally use manual underwriting or automatic underwriting, and they will usually submit applications to an automated system first. Fannie Mae provides an automated underwriting system and a manual underwriting option.

Automated underwriting can also be used for other loan products. “Automated underwriting is generally more common for things like credit cards as well as personal and auto loans,” Verdyan says.

Depending on your circumstances, manual underwriting may be required or useful. “Manual underwriting tends to be more common for larger loans like mortgages and commercial loans and at smaller financial institutions that don’t have the infrastructure in place to automate underwriting based on formulas and algorithms,” Verdyan says.

Manual underwriting is also more commonly used for borrowers with complex income statements or balance sheets, such as businesses, he says.

“Any time that the system is unable to define ‘income,’ a lender may default to a manual underwrite,” Holtz says.

[Read: Best FHA Loans.]

What Do You Need for Manual Underwriting?

“Manual underwriting generally requires more documentation than automated underwriting,” Verdyan says. You can expect to be asked to show the following documents for manual underwriting, according to Verdyan:

— Your credit report.

— Multiple years of tax returns showing your income.

— Pay stubs.

— Your assets and liabilities, including bank and investment statements.

— Business documents if you are self-employed.

“Basically, if there are uncertainties in your financial documents, you need to be able to demonstrate that you can and will repay this loan with no issue,” Verdyan says.

Every loan is different, however, so your underwriting experience may vary based on the type of loan you want and your lender.

“Do your research on mortgage companies and what they offer in regards to underwriting,” Holtz says. “Also, work with your loan officer or processor to determine what paperwork will be most beneficial in helping you qualify for a loan prior to underwriting to speed up the process.”

More from U.S. News

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What Is Manual Underwriting? originally appeared on usnews.com

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