If you’re in the market to buy a home and you are planning to obtain a home loan, you will be going through the process of underwriting. This is a step in the home buying process when a lender will be assessing an applicant’s financial situation including their credit, income and debt. This process dictates how much home a buyer can afford and what the lender is comfortable giving as an interest rate on the mortgage. Underwriting is not just for home loans, but also for insurance coverage and some investments. Home buyers who are paying cash are also subject to the underwriting process, as well as title insurance, but that is a topic for another day. There are two different ways to approach underwriting including: auto underwriting and manual underwriting.
What is Manual Underwriting?
Also known as “desktop underwriting,” manual underwriting is when a lender can give preliminary approval to buyers and assess their financial situation. Manual underwriting, as in the name, is done by a human who sorts through an applicant’s debt, income, credit, history and other financial attributes to get a holistic picture of the potential risk an applicant has in paying their bills. Desktop underwriting is commonly used in the early stages of the loan process where a human lender will go through the process of evaluating an application for risk. Auto underwriting is done by a computer algorithm that combs through an applicant’s numbers and provides a computer-generated decision. Some critics of auto underwriting claim that the process is not as thorough as the human aspect of desktop underwriting. AI is now also playing a stronger role in the process of auto underwriting, and automated valuation models are contributing more and more.
Who uses Manual Underwriting?
In today’s market, it’s very common that most lenders use a combination of both auto and manual underwriting. Desktop underwriting is most common early in the process. Manual underwriting can be beneficial for buyers who don’t have a very long credit history, or the buyer may not have credit at all. Buyers with poor credit may also benefit from manual underwriting too, but this is dependent upon the lender and their discretion. Buyers with non-traditional income streams or job history can also benefit from manual underwriting. Likely, a lender will use multiple factors when assessing the health of a potential home loan.
Manual Underwriting and Time
Since lenders commonly use both manual and auto underwriting, once under contract on a home, the emphasis shifts to manual underwriting based on the exact circumstances of a property under contract and takes it to the next steps. A lender will want to personally assess a potential loan to ensure the application is strong. Manual underwriting can take a much longer time, sometimes up to 60 days or longer, than auto underwriting and the speed of underwriting is critical in the housing market. A computer generated decision from auto underwriting can be instant. Speed to complete either varies by loan type and the complexity of a buyer’s financial health.
What to provide for Manual Underwriting?
For underwriting in general, the more you can provide that proves you are a stable applicant, the better. It is common for a lender to request things like multiple years of tax returns for both you and any business you may own, bank statements, possibly your resume and complete job history, recent pay stubs or earnings from your business and expenses for any business you have. Likely, a lender may request more pieces of information, but this is a good start. For those who are establishing or rebuilding their credit, a lender will need proof that an applicant is reliable and will pay their bills on time. For example, a savings account with a healthy reserve will help to offset inconsistent job history. Manual underwriting is based on the discretion of the lender, so anything you can do to help make your file stronger will only benefit you and your odds of being approved for a loan.
Do you have concerns or questions about manual underwriting? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]
