In particular, how does manual underwriting benefit you as a mortgage borrower?
Lenders make loans to borrowers every day. They use an automated underwriting system (AUS) such as Desktop Underwriter® to approve mortgages. There are cases, however, when a loan is manually underwritten due to certain circumstances.
Nonqualified mortgages, for instance, require manual underwriting where a loan officer makes the credit decision. With the demand for nonqualified loans projected to grow next year, there’s a need for manual underwriting. But, what is it exactly? Is it beneficial to have your loan manually underwritten?
How Does Manual Underwriting Work?
Under AUS, the software approves a loan application based on its characteristics and attributes inputted to the system.
Income, credit history, loan-to-value ratio, and debt-to-income ratio are just some of the things evaluated by an AUS.
This computerized loan approval process saves lenders a lot of time and makes their decisions more human-error free or unbiased, so to speak.
DU®, a widely used system to assess loans eligible for Fannie Mae purchase (Loan Prospector® for Freddie Mac loans), approves mortgages based on their overall risk factors, as enhanced.
There are loans that don’t receive an Approve/Eligible recommendation on DU®. While they are not outrightly rejected, they may be referred for further lender verification.
For instance, the applicant has no credit score or credit history. The lender may look into his/her payment history on rents, utilities or car insurance to establish a credit profile.
Poor credit scores, negative credit events like bankruptcies also present an issue. Moreover, the lender may have to look for alternative proofs to document employment or income.
Under these circumstances, the lender is doing manual underwriting. Because DU®, or any AUS for that matter, runs on logic and precision, it can’t complete approval of loans with incomplete requirements.
It thus defers certain loan files to humans such as loan officers to make the decision of approving or denying a loan application.
The process could take some 60 days to complete. There’s going to be a back-and-forth process of paperwork to be submitted by the borrower and verified by the lender.
That’s a lot of time spent versus an automated underwrite. There’s also the cost of originating such loans that may be passed on to the borrower.
Manual Underwriting for Nontraditional Borrowers, Loans
Against this backdrop, it’s understandable that not all lenders choose to manually underwrite loans. There’s a specific market for that and there are lenders who opt to meet this demand.
Tom Hutchens, Angel Oak’s senior vice president of sales and marketing, said in an interview with Mortgage Orb that all its loans require manual underwriting. Angel Oak specializes in nonqualified loans.
He also expressed that the costs of making 100% manually underwritten loans are enough to discourage some lenders to join the market.
Still, if lenders want to expand their business, they’d have to offer more options, Mr. Hutchens said. This is in line with the non-QM loans poised for growth in 2018.
So, what’s in manual underwriting for you?
Manual underwriting could be your chance to be considered for a mortgage if you are among those creditworthy borrowers who are shunned out of the automated process with its exacting requirements.
You may be able to work it out with the lender to offset your low credit score or high debt-to-income ratio with ample reserves or bigger down payments.
Essentially, manual underwriting bridges nontraditional borrowers to nontraditional loans.