How Does A Manual Underwriting Mortgage Work?
Here’s what to expect if your lender manually underwrites your loan.
Collection Of Your Financial Information
Before an underwriter can decide whether you qualify for a mortgage, they need to understand your financial situation. Your lender will ask you for quite a bit of documentation if they’re manually underwriting your loan. Some things you might need to provide include:
- Up to 12 months of bank statements
- Several years of tax returns
- Your resume or CV (for your underwriter to verify your employment)
- Account information from your retirement account or taxable brokerage account
- Verification of any other assets you own, like vehicles or homes
- Recent pay stubs that prove you have consistent, reliable income
- Profit and loss statements if you’re self-employed or own a small business
Your job is to provide your lender with any documentation or information they need. For fastest results, you’ll need to have all this documentation on hand before your lender asks for it.
Review Of Your Credit Report
Your credit report contains information about your relationship to debt. Your credit report shows your lender things like loans and credit accounts in your name, and it also contains information about any missed or late payments on these accounts. When your underwriter looks at your credit report, they aren’t just looking at your credit score. Additionally, they’re checking to see if you have a history of consistent, on-time payments.
If you don’t have any items on your credit report, your lender might ask you for proof of past payments. Records of on-time rent, utility and even insurance payments can boost your chances of approval during a manual underwrite.
During this stage, your lender might ask you for a letter of explanation. This is a personal letter written by you that explains an item on your credit report. Let’s say you have a foreclosure or bankruptcy on your credit report – your lender will want to know what happened.
Try not to panic or take it personally if your lender asks you to explain an item on your credit report. A request for a letter of explanation won’t stop you from getting a mortgage. On the contrary, this request means that your lender is still considering you for a loan. If you didn’t qualify, the lender would instead outright reject you. Write a short, direct letter explaining any discrepancies to keep your application on track.
Review Of Your Income And Assets
Next, your lender will look at your personal income and assets. Your lender will compare how much money you have coming in to how much you’ll need to pay each month if they give you a loan.
Your underwriter might reach out to your employer to learn more about bonuses, overtime or commissions you earn. They might also ask about your history with the company and how long you’ve been employed there.
This is to determine the probability of you leaving your job in the near future. Although there can be exceptions, you’re less likely to lose your job and fall behind on your payments if you have a long history with your employer.
Your underwriter will also look at your assets during this stage. Anything that you own that has significant value is an asset. Cash in the bank is the most obvious example of an asset, but your underwriter will also look at your retirement and brokerage accounts as well.
The goal of analyzing your assets is to ensure that you can cover your closing costs and down payment and to keep up with your loan payments.
Review Of Your Debt And Liabilities
Your lender will next look at your debt and financial liabilities. One of the first things that your underwriter will calculate is your DTI. Your DTI describes how much of your monthly income goes toward expenses. If most of your income goes to things like credit card payments, rent and loan payments, your DTI will be extremely high.
You’ll have a lower DTI if you have income left over after you pay your bills. Lenders like to see low DTI because they signify that you aren’t overstretched in paying your bills each month.
Underwriters will also look at other regular recurring financial liabilities. Let’s say you pay child support, back taxes or other court-ordered judgments. Your lender will consider this in their decision. Your underwriter wants to know that you’ll be able to afford your mortgage in addition to all of your current debts.
Review Of Your Collateral
Finally, your underwriter considers your collateral – that’s your down payment and your property value.
The larger your down payment, the less of a risk you are to a lender. You borrow less money when you bring a larger down payment to the closing table. You don’t need a full 20% down payment, but you almost always need at least 3% down.
This down payment must come from your savings or a gift if allowed by your loan type. If you take out a loan to pay for your down payment, that’s a sign of risk for the lender.
Your underwriter will comb through your bank statements to determine where your down payment is coming from. Large or sudden deposits will trigger a red flag. You may need to write a letter of explanation for any unusual deposits outside of your standard income. You’ll also need documentation to back up your claim.
For example, let’s say you sell a car and deposit the money into your bank account. Your underwriter may ask to see the title transfer and proof of sale. The person who gave it to you may need to write a letter confirming that the money isn’t a loan.
Finally, your lender will order a home appraisal for your property. During the appraisal, a home value expert will take a tour of your property and assign an official estimate of value. Lenders require appraisals because they want a professional opinion of the value of your property. You may need to adjust your offer or bring a larger down payment if an appraisal comes back low.
Final Decision
Your underwriter will then issue a final decision on your loan application. The underwriter can deny your loan, approve it or issue a suspension with contingencies. If your application has contingencies, it means that your underwriter needs more documentation before they can approve you. You might get an approval, a denial or a suspension with contingencies. If your application has contingencies, it means that your underwriter needs more documentation before they can approve you. Be sure to respond to these inquiries quickly to receive a decision.
