Manual Underwriting
Manual underwriting refers to the process in which a human underwriter, rather than an automated system, evaluates a loan or mortgage application. In manual underwriting, the underwriter carefully reviews each aspect of the applicant’s financial status, employment history, and documentation to make a decision. Unlike automated underwriting, which generates a decision based on algorithms, manual underwriting allows for more thorough consideration of unique circumstances. An interesting fact is that many individuals whose applications are denied by automated systems may find approval through manual underwriting, especially if they can demonstrate financial responsibility in ways not reflected in a standard credit score.
What is Manual Underwriting?
Manual underwriting is a detailed loan approval process performed by a lender’s underwriter, who personally examines your income, assets, debts, and overall financial profile. For example, if a self-employed applicant is applying for a mortgage without traditional payslips, the underwriter can request alternative documents, such as bank statements and tax returns, to verify steady income. This method is especially valuable for borrowers with unusual income sources, gaps in credit history, or significant life changes. In one real-world scenario, an entrepreneur with irregular income may be denied by automated underwriting but, through manual underwriting, can provide evidence of reliable cash flow and savings, making loan approval possible.
Practical Example of Manual Underwriting
Consider a freelance graphic designer applying for a business loan. This applicant lacks traditional employment verification but can show two years of tax filings and twelve months of consistent bank deposits. The manual underwriter reviews these documents, contacts references, and assesses rental payments and utility bills as further proof of financial reliability. In contrast to automated checks that might reject the application due to missing standard income documentation, the manual review reveals a responsible borrower and can lead to an approval.
How the Manual Underwriting Process Works
The manual underwriting process involves several steps. First, the applicant submits detailed records, such as bank statements, tax returns, employment letters, and identification documents. The underwriter examines not only the credit report but also non-traditional factors like rent payment history and savings account balances. They may reach out to the applicant for clarifications or request extra documents. This approach allows the underwriter to develop a full picture of the applicant’s financial stability. As a result, manual underwriting can take longer than automated methods, but it offers a more thorough and customized evaluation.
Pros and Cons of Manual Underwriting
There are notable advantages to manual underwriting. It provides personalized assessment, catering to applicants with non-traditional financial situations, such as freelancers or recent immigrants. Borrowers gain the opportunity to explain unique circumstances, increasing access to loans for those who would otherwise be declined. However, manual underwriting is time-consuming, often requiring extensive documentation and back-and-forth communication. It may also result in stricter scrutiny of the applicant’s spending habits and assets. For lenders, manual underwriting incurs higher costs due to the extra time and resources involved, which are sometimes passed on to borrowers in the form of higher interest rates or fees. Despite these drawbacks, manual underwriting remains an essential option for those needing an individualized review.
Differences Between Manual and Automated Underwriting
Manual underwriting relies on human judgment, while automated underwriting uses set rules in software systems. Automated underwriting is quicker and less resource-intensive, best for applicants who meet all standard criteria. However, it lacks the flexibility to accommodate unique situations. Manual underwriting offers that flexibility, but with slower turnaround times. For example, a gig economy worker may not fit the profile for automated systems, necessitating a manual review to factor in all sources of income and financial behaviour.
Applications and Use Cases
Manual underwriting is frequently used for mortgages, personal loans, and small business loans involving applicants with irregular incomes, limited credit history, or significant credit events such as previous bankruptcy. It is especially common where alternative documentation is required, providing opportunities for individuals who are self-employed, live on seasonal income, or have gaps in their credit files. Lenders may also use manual underwriting for complex loan scenarios, including loans with non-standard collateral or for property types outside normal guidelines.
Important Considerations in Manual Underwriting
Applicants considering manual underwriting should prepare by gathering comprehensive financial records, including bank statements, tax returns, rent payment histories, and letters from clients or landlords. Being proactive with documentation can help speed up the process. It is also important to understand that manual underwriting may require more direct interaction with underwriters and additional explanations of unusual financial activity.
Understanding manual underwriting can empower applicants with complex financial backgrounds to access borrowing opportunities that standard automated systems may overlook. For readers considering loan or mortgage applications and uncertain about eligibility, learning about options such as manual underwriting and being prepared with the right documentation can make a significant difference. For those seeking guidance or more information about business finance options, our business funding solutions page provides educational resources for every stage of the funding journey.
