What is manual underwriting?
When you fill out an application with a mortgage lender, the lender will run your application through an automated underwriting system. These systems have algorithms that include all the underwriting guidelines from Freddie Mac & Fannie Mae and match the information on your loan application with those guidelines. An actual underwriter still must underwrite and approve the loan application, but an automated approval is the starting point.
If the automated underwriting systems approve the application, then you are approved for the mortgage. Sounds simple enough, right?
But what happens if the system does not approve the application? The commonsense answer to that is you're not going to be buying a house, and this is unfortunately the end of the road with some lenders. However, there is such a thing called manual underwriting. Manual underwriting is when an underwriter analyzes your application data, finances, and documentation to determine if certain compensating factors would cause you to be eligible for the loan to be approved.
Compensating factors can include things such as your savings, residual income left after your bills are paid, no debts other than your new mortgage, and the increase in your monthly payment from what you have been paying in rent/current mortgage to what your new mortgage payment will be.
So, depending on what caused your loan application to not be approved through the underwriting system, and if you meet one or a combination of the compensating factors, then there is still a great possibility of your lender approving your application and you becoming a homeowner.
Writer: Michael Iliff, Loan Officer Southpoint Financial Services