Conventional Loan Manual Underwriting: Your Application's Second Chance at Approval

Manual underwriting can turn your denial into an approval under the right circumstances.

It’s your loan application’s second chance at life. Sometimes, the underwriter can make or even overturn a lending decision without the use of a computer program. This is the definition of manual underwriting.

To Understand Manual Underwriting, You Have To Know About Automated Underwriting

Fifty years ago, all underwriting was “manual.” It simply means a person reviewed a loan application. The underwriter made a decision based on the lender’s guidelines, and, probably in some cases, gut feeling.

These days, the vast majority of loans are approved or denied by computers.

Because “automated underwriting” by a computer program has become so common, a separate term needed to be coined for when a computer does NOT make a credit decision. This is manual underwriting.

Automated underwriting is the default mechanism for loan decisions for Fannie Mae, Freddie Mac, FHA, VA, and USDA loans.

Each loan type has its own system.

• Fannie Mae: Desktop Underwriter (DU)

• Freddie Mac: Loan Product Advisor (LPA)

• FHA: Technology Open To Approved Lenders (TOTAL)

• VA: Automated Underwriting System (VA AUS)

• USDA: Guaranteed Underwriting System (GUS)

These programs are collectively called “AUS” systems. The one your lender uses depends on the type of loan you’re seeking. For conventional loans, your AUS system will either be DU or LPA.

Can Conventional Loans Be Manually Underwritten?

Conventional loans backed by Fannie Mae and Freddie Mac can be manually underwritten.

In most cases, your file will be run through computerized underwriting (DU or LPA) first. If a non-approved result returns, the lender might choose to manually underwrite the loan.

You may need a manual underwrite if:

• You have thin or non-existent credit: Those who don’t use credit also don’t build a credit profile or score. AUS systems are tuned to analyze traditional credit reports.

• You have a past credit event: Those with bankruptcies or foreclosures in their past might not be approved by an AUS. An underwriter may need to review strong points in your file to compensate for past issues.

• You have disputed items on credit: Disputed medical bills, collections, and late payments are automatically factored into an AUS decision whether or not they are accurate. Unless you can get the credit report fixed, a human will have to review the file.

You may also need a manual underwrite if you are seeking a non-traditional loan outside of standard conventional or government programs. For instance, jumbo loans, real estate investment loans, and construction loans will be reviewed solely by a person.

Fannie Mae Guidelines For Manual Underwriting

If you receive a conventional loan manual underwrite, you’ll need to meet stricter criteria, including the following (fixed-rate mortgage, 1-unit purchase):

36% or less DTI

• 5-25% down: 680 credit score; 660 with 6 months reserves

• 25%+ down: 640 credit score; 620 with 2 months reserves

36.01-45% DTI

• 5-25% down: 720 credit score; 700 with 6 months reserves

• 25%+ down: 680 credit score; 660 with 6 months reserves

You are not eligible for a 3%-down mortgage via manual underwriting or a loan above the standard conventional loan limit of $766,550 in 2024.

What Lenders Allow Manual Underwriting And What Do They Look For?

Not all lenders allow manual underwriting. If your lender won't manually underwrite your file, find one that does.

Manual underwrites aren't universal because they come with inherent risk that could put the bank in financial or legal hot water. After all, most manual underwriting is done because the agency's sanctioned computer system can’t or won’t issue an approval.

An underwriter must overturn an algorithmically-formed decision, or lack of decision due to missing loan elements. The underwriter and lender go out on a limb, so to speak, to approve the file.

As you can imagine, the file must have some very strong aspects to justify approval. These are called “compensating factors” including:

• A large down payment

• Low DTI

• Large asset reserves

• Perfect rental history

• Perfect payment of utilities and other bills that are not on a credit report

• A strong letter of explanation for past credit events

A strong file that's deficient in only one or two areas will give the underwriter a case on which to build your mortgage approval.

Conventional Loan Alternatives When Manual Underwriting Is Needed

While conventional loans can be manually underwritten, you may have better luck choosing another loan program. Some lenders will underwrite an FHA loan manually, but not a conventional loan.

FHA: Allows higher DTI ratios for manually underwritten loans, up to 50% with two compensating factors.

USDA: Some USDA lenders can approve a file manually if it is rejected by USDA’s GUS system.

VA: If you have eligible U.S. military service, ask your lender to change your loan type to a VA loan. This AUS system may approve your file when DU and LPA will not.

Manual Underwriting Documentation

Manual underwriting will require more documentation for approval.

• Non-traditional credit verification like rent and utility payment history (if no credit score)

• Letters of explanation for past credit events

• Proof that items on the credit report are inaccurate

• Income documentation like paystubs, W2s, and tax returns if self-employed

• Bank statements

• Other documents as required by the underwriter

Conventional Manual Underwriting FAQ

Does manual underwriting take longer?

Manual underwriting will take longer than automated underwriting due to additional steps, more manpower, and second reviews by management. How long it takes depends on the complexity of the file and the reasons it was pushed to a manual underwrite.

What are the chances of being approved for a conventional loan with manual underwriting?

Your chances of being approved are better if you can show strong compensating factors like a low DTI, cash reserves after closing, and good rental history. Another compensating factor is when your mortgage payment is the same or lower than your current rent.

If I have a lot of debt, will manual underwriting help me qualify for a conventional loan?

It will be more difficult to qualify using manual underwriting. Whether you use a conventional loan or another loan type, debt-to-income limits are lower. For example, someone with a 680 credit score needs a DTI of 36% with manual underwriting. The same borrower might be approved with a DTI up to 45% using automated underwriting.

If I have a recent bankruptcy or foreclosure, will manual underwriting help me qualify for a conventional loan?

Applicants with a bankruptcy or foreclosure still must meet waiting periods set by Fannie Mae and Freddie Mac. If you’ve met those waiting periods, then it’s possible manual underwriting can help you get approved if the automated system does not issue an approval.

If I am self-employed, will manual underwriting help me qualify for a conventional loan?

Typically, an underwriter will manually calculate your self-employed income whether it’s a manual or automated underwrite. This is the income used for the automated system. So you won’t get “extra income” by requesting a manually underwritten loan.

If I am buying a non-traditional property, such as a manufactured home or a fixer-upper, will manual underwriting help me qualify for a conventional loan?

No. In fact, you may face stricter requirements with manual underwriting than with computer underwriting. A person manually reviews the property either way.

Manual Underwriting Could Make You A Homeowner

Manual underwriting isn’t something to fear. Rather, it’s your “second chance” at a home loan approval.

The best plan is to apply with a lender to see if you can be approved, even if you think approval is out of reach.