What manual underwriting is and when lenders use it

Manual underwriting is a lender’s decision to have a person — not only an automated underwriting system (AUS) — evaluate a mortgage or loan application. Lenders typically use manual underwriting when an AUS (for example, Fannie Mae’s DU or Freddie Mac’s Loan Product Advisor) cannot issue an approval or when the borrower’s financial profile includes elements that need context (irregular income, thin credit files, recent credit events, or complex asset sources) (see Consumer Financial Protection Bureau: https://www.consumerfinance.gov/).

When manual underwriting may be triggered

  • Irregular or fluctuating income (self-employment, gig work, seasonal jobs).
  • Limited or no credit history (thin files or recent immigrants).
  • Recent derogatory credit events (short sales, charge-offs, bankruptcy) with compensating factors.
  • Complex assets or large deposits that need sourcing.
  • AUS refer/undetermined findings that require human review.

What underwriters look for

Underwriters verify and weigh the borrower’s full financial picture instead of relying only on credit scores. Typical review items include:

  • Income documentation: W-2s, 2 years of tax returns, profit-and-loss statements for self-employed borrowers (IRS: https://www.irs.gov).
  • Liquidity and reserves: bank statements, retirement or investment account statements.
  • Debt-to-income considerations and the stability of employment or earnings.
  • Explanations for credit events and supporting documentation (settlement letters, court documents).
  • Compensating factors such as large cash reserves, long employment history, or significant down payment.

How manual underwriting affects borrowers

  • Time: Manual reviews usually take longer than automated approvals because they require document collection and human analysis.
  • Documentation: Expect requests for more detailed paperwork and written explanations for anomalies.
  • Outcomes: Manual underwriting can approve borrowers who would be declined by an AUS, but lenders still expect evidence showing overall ability to repay.

Professional tips to improve manual underwriting outcomes

  1. Gather documentation early: tax returns, two months of bank statements, profit-and-loss statements, and signed explanations for any credit issues. For a ready checklist, see Preparing for Loan Underwriting: Documents Lenders Prioritize for Fast Decisions (https://finhelp.io/glossary/preparing-for-loan-underwriting-documents-lenders-prioritize-for-fast-decisions/).
  2. Explain anomalies upfront: a short, signed letter describing gaps, one-time deposits, or recent job changes reduces back-and-forth.
  3. Demonstrate reserves: extra months of cash savings or a larger down payment are strong compensating factors.
  4. Consider lenders that specialize in nonstandard cases: some banks and credit unions have formal manual-underwriting programs and more experience with self-employed borrowers (see Preparing for Loan Underwriting as a Self-Employed Applicant: https://finhelp.io/glossary/preparing-for-loan-underwriting-as-a-self-employed-applicant/).

Common misconceptions

  • “Manual underwriting is easier.” In fact, it often requires more documentation and more careful justification of borrower circumstances.
  • “Manual underwriting always means higher rates.” Rates depend on the lender’s policy and overall borrower risk; some manually underwritten loans secure competitive pricing when compensating factors are strong.

Quick manual-underwriting checklist

  • Two years of tax returns (if self-employed) or W-2s for salaried workers.
  • Recent bank statements showing reserves and documenting large deposits.
  • Signed letters explaining any credit or employment anomalies.
  • Documentation to source large deposits (sale proceeds, gifts, transfers).

Related resources on FinHelp

Final note and disclaimer

Manual underwriting is a valuable option when a borrower’s financial picture doesn’t fit standard automated models. It gives underwriters discretion to consider real-world context, but it also requires thorough documentation and patience. This article is educational and not individualized financial advice. Consult a mortgage advisor or certified financial planner for guidance specific to your situation.

Authoritative sources: Consumer Financial Protection Bureau (https://www.consumerfinance.gov/), Fannie Mae (https://www.fanniemae.com/), and the Internal Revenue Service (https://www.irs.gov/).