S2E47 – Manual Underwriting When Getting A Mortgage

Are you a first time home buyer wondering what goes into the mortgage underwriting process when buying a home? What is manual underwriting and why is it important? How is different from getting automated underwriting? What happens during the manual underwriting process? What does the underwriter review when deciding on whether or not to approve your mortgage loan? In this episode, we discuss the differences between automated underwriting vs manal underwriting to help you become The Educated HomeBuyer.

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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: What is underwriting? More specifically, what is manual underwriting when it comes to getting your loan approved when buying a home? So we’ve done an episode in the past where we’ve actually gone into the process of how underwriting works, how an underwriter looks at a file. Today’s a little bit different in the idea that most loans are automated to some extent, right, Josh, and you’re going to elaborate on this in a little bit more detail, but most loans are automatically approved, but there’s a portion of buyers out there that they don’t meet that qualification to have that automated approval, therefore it has to go to an underwriter to be manually underwritten. 

In today’s episode, that’s really what we’re diving into in more detail. So Josh manual underwriting, kind of a brief overview. What is it? 

[00:00:55] Josh Lewis, Certified Mortgage Consultant: Let’s just start with automated underwriting and what that is. So I’m old. We’ve gone through that multiple times on the show, but in 1996, when I started doing loans, there was no such thing.

I think we got a desktop underwriter, Fannie Mae’s version of automated underwriting in 97 or 98. And I remember all of the old dog underwriters saying, this is stupid. Machines are never going to replace us. And they are correct at least through 2023. We’ve gotten to the point where almost all the files are done with automated underwriting, but it is a tool that your underwriter uses to validate and verify that the loan conforms to the guidelines of the loan program that you are applying for.

VA, FHA, Fannie Mae, Freddie Mac, USDA. They all have their own automated underwriting systems that are programmed with the guidelines of the loan. So the underwriter is actually going through and validating and verifying the correct information.

So they want to confirm the income. They want to confirm the employment history. They’re looking at the title report. They’re looking at the appraisal. They’re looking at all of those things in the file. But the last thing that they do, once they’ve confirmed the accuracy of all the information, so they push a button and they send it through the automated underwriting system.

For USDA that’s Gus. For Fannie Mae it’s DU. For Freddie Mac, it’s Loan Product Advisor. FHA can go through either of those, but it’s the TOTAL scorecard. And basically all it is doing is in an automated way, making sure that once the underwriter has tightened up the file and we don’t have garbage in, so we’re not getting garbage out.

We have clean information. It is giving you back an automated approval. So with that, it tells them what they need. The benefits of this is oftentimes automated underwriting can go to higher debt to income ratios. It can have less requirements in terms of documentation. Maybe you only need one year of tax returns and W2s.

Maybe we don’t need to explain collection accounts because it’s already been taken into account by the automated underwriting system. So when we do not get that automated approval, we are looking at a situation where the file has to be manually [00:03:00] underwritten. It is not always an option. It’s not an option for every loan program, but for many, if not most, it is.

And Jeb, what the genesis of today’s conversation is. We had someone from the live show asked, can you do an episode? Can you explain what manual underwriting is? And you give me your thoughts on this, but I think the reason why that is out there is in the world of YouTube, in the world of podcasts, people are wanting to talk about things.

They want to throw headlines up. One of the ones that’s a pet peeve of mine, people talking about, Oh, I have a 581 credit score so I’m eligible for FHA. Yes, the guideline says if you have a 581 you can do a minimum down. Doesn’t guarantee it. Doesn’t mean you will get an automated approval. So another thing that’s sexy to throw out in your topic for your video or your podcast episode is manual underwriting.

Doesn’t matter. You couldn’t get an automated approval. You can get manual underwriting. So we’re going to go through all the details of that. What the downsides are. When it can be used when it can’t be used. When it has to be used even on a file that otherwise can get an automated approval.

[00:03:57] Jeb Smith, Huntington Beach Realtor: Yeah, Josh, we’re going to talk about this in detail, but I think it’s important to give people an overview to start with why would someone not get an automated approval, right? So why would you ever have to get to this phase? Is it because your credit is less than perfect? Is it because you have maybe some collection accounts? What classifies someone to get pushed to the side and need somebody to manually go through the file to make sure they’re approved.

[00:04:22] Josh Lewis, Certified Mortgage Consultant: It’s generally credit related. Won’t say that’s the only situation where that happens. But credit related, debt to income related and the reason why we’re being a little bit vague on this is the automated underwriting systems are truly a black box. We don’t know what the algorithm is.

For manual underwriting for standard traditional guidelines it is in the underwriting manual for Fannie, Freddie, FHA, VA. We can look and we go, this is what the standard ratio is, but we can almost always exceed that. So we’ll get a situation where in some of these loan officer groups that I’m in online, people will reach out and say, Hey, I have no idea what’s going on.

I have a 695 credit score. So it’s not the best credit, but it’s not bad credit. I get these approved all the time. And this is a conventional loan with a 43 percent debt to income ratio. Why will this not approve?

Impossible for anyone to say, unless you’re the engineers at Fannie Mae that can pull that automated underwriting algorithm apart and say, but another important thing to note there is those algorithms are constantly getting updated.

You know, we get two, three, four updates a year, and they’ll tell us in broad strokes, what the update is. But until it gets out in the real world and in those loan officer forums, where we start talking anecdotally what we’re seeing in general, what we’ve seen over the last few years is a tightening. Less situations where we get appraisal waivers, less situations where you can go over a 45 percent debt to income ratio, more situations where you see a random weird number, like it’s got to stay under 40, it’s got to stay under 36 to get an approval. 

So when you say what causes it? It’s the overall strength of the file. So the big [00:06:00] things in that are debt to income ratio, credit score, most importantly, and financial position. So meaning, do we have any reserves? Do we have any other funds that are available should you run into financial difficulties.

[00:06:16] Jeb Smith, Huntington Beach Realtor: We’re probably going to get a cease and desist on this episode because Josh just played copyrighted music mid podcast. So, you know, this episode could disappear. So if you hear it and you like it, make sure you share it quickly. 

But no, in all reality, Josh I want to throw this out there. This is not part of our outline, but I think it’s important for people to know. The pre approval process is a relatively easy process to go through. And I say that because it’s really a matter of a borrower providing documentation to a professional on the other side. You know, W2s, pay stubs in some cases, tax returns, you know, asset account statements, letting a lender run your credit to get an idea of your file, right? 

And from there, they can take that information, put it into a loan application and submit it through one of these automated underwriting engines to come back and say, Josh, you’re actually approved to buy a home. Now with that, there’s no a hundred percent certainty at that point that you are fully approved, right?

It’s a pre approval because until you have appraisal, until you have everything ready to go, the property locked in, nothing is done, right? It’s not done until it’s done. And what I often hear is people going through more of a prequal stage. They talk to a lender. 

Hey, Josh, I have a 750 credit score. I make a hundred thousand dollars a year. I’m putting 5 percent down. These are the debts that report on my credit score. Can I buy a house? And some people might just look at it and go, yeah, based on that, you’re pre approved to X amount. Right. Without ever getting that documentation. That leaves a lot to be determined.

And they didn’t even take the time to gather the documents and at least run you through that stage of that automated underwriting. And so the automated underwriting is only as good as the information that was put in there. So if you’re working with a jackass, so to speak, that doesn’t understand the business, that isn’t getting documentation, in some cases, they don’t understand how to read tax returns.

And this sounds crazy that I’m even saying this because you’re like, how could somebody be doing this business and not understand this? There’s a lot that don’t. That truly don’t understand how to read tax returns in detail and be able to factor this stuff in. And so a lot of times incorrect information is put into these files and it spits out an automated approval and it says, Josh, you’re good to go. You’re approved. 

And then you get into the process and realize, no, that wasn’t input correctly. So I’m throwing this out there to make sure that if you’re going through the process, make sure you’re working with somebody that knows the business. Has experience. Not the guy that just, you know. It was another job yesterday and now became a loan officer because it was busy and heard people were making money.

Just take the time, do your research and make sure you’re working with a professional out there in the business because it will save you some time. And the other thing I say about that, Josh, is that if [00:09:00] for example, it goes through its automated underwriting system and it comes back and it says approve/ineligible, right? That’s one of the things that can come out of that. 

 Well, You can go in and change a couple of things in some cases and just make it spit out an approve/eligible without actually having the documentation and the information necessary to do that. And so somebody can tell you you’re approved when in fact you’re not. 

Kind of taking us off course a little bit, but it just, it is so important and people truly don’t understand it because people want to hear what they want to hear. Right. And so if you’re telling me that I’m approved, that’s what I want to hear. I don’t want to hear that I’m not approved. So I’m going to believe you and go with it when in fact, maybe you haven’t done the right work. So 

[00:09:37] Josh Lewis, Certified Mortgage Consultant: There’s actually a couple of really important things there that you brought up. So let’s talk about when the file goes through the automated underwriting system, assuming good and accurate information has gone in. We’re not putting garbage in. We’re not getting garbage out. We have a valid outcome. 

What you’re looking for is approve/eligible. Loan prospector Freddie Mac’s system will come back with Accept, but a version of that. If it doesn’t approve, it’s going to come back approve ineligible. Ineligible generally means, Hey, the way you’ve entered this doesn’t meet the program guidelines.

And what does that mean? Okay. We’ve put it in as a zero down conventional loan. There’s no such thing as a zero down conventional and it’s ineligible because we haven’t met the down payment requirements. 

But then there’s also refer eligible which says, okay, the loan, the way it’s structured meets the guidelines, there is a program for that, but the refer says the borrower doesn’t meet that. So primarily what we’re talking about today is situations where the borrower doesn’t meet the guidelines and is getting pushed to a manual underwrite. And let’s also just a really quick overview of who are the people that have their hands in your file.

[00:10:40] Jeb Smith, Huntington Beach Realtor: What is underwriting Josh? Like the basis of underwriting. 

[00:10:43] Josh Lewis, Certified Mortgage Consultant: So you just talked about, it’s important that you work with a loan officer, a loan originator, a mortgage consultant that knows what they’re doing. That’s my job. That’s my role. We make the first conversation. We learn from you what you want to do. We gather the basic documentation that allows us to accurately calculate income, to determine that you have the funds available. We pull your credit and we’re doing that pre approval. 

So between there and underwriting, which, what did we say underwriting is? The underwriter is going through reviewing all of that documentation, making sure we have an accurate income calculation. That we don’t have any large deposits or anything weird with the assets that we can’t use.

They’re going to go even further. They’re going to look at the appraisal. They’re going to look at the preliminary title report. They’re going to look at everything in the file and make sure all of our ducks are in a row. 

There’s generally a person also in between there. That is the loan processor. I am a salesperson. So after we do that pre approval, I am out working with more people who would like to apply, who would like to start that process. A lot of what we’re talking about there is important detailed desk work. It’s not unimportant. It’s not trivial. A loan processor is very important. But their job is to get all the ducks in a row. 

The underwriter is not going to go back and track down a revision to an appraisal or a correction from title. The processor is the person who [00:12:00] is working your file to make sure everything is in there that the underwriter required. 

[00:12:04] Jeb Smith, Huntington Beach Realtor: Josh, I want to point out how important that person is because a lot of times that person knows more than the loan officer knows. In your case, that’s not true, but a lot of times the loan processor, the underwriter, are the glue that holds that whole thing together, because the loan officer, a lot of times is the salesperson, right? They know how to get business, but a lot of times they don’t understand the intricacies of that business.

it’s important a lot like real estate to find the professional that not only understands it can convey it is good at sales, but is also understanding of how the file works. Hey, if the loan processor is not here, I can still do the job. Like if a loan processor doesn’t show up today, your file is still going to be approved. It’s still going to get to the next step. 

There are people out there that if they don’t have the loan processor, the world crumbles. And again, we get off on a tangent here, but it’s because we see so many issues in the 


[00:12:53] Josh Lewis, Certified Mortgage Consultant: So in that context let’s go back and pick up that conversation of, okay, you are a refer. You are not getting an approval and it is you, it is not the way the loan is structured. You are the issue. When is a manual underwrite available? And what does that mean? 

Technically all of the loan programs that we’re talking about will allow a manual underwrite. So before we go too far into the details of that, Jeb, I want to start the conversation where we go back, who is the world’s biggest proponent of manual underwrites?

It is one Dave Ramsey. I don’t want anyone out there going, Jesus, these guys will not stop talking about Dave Ramsey. They really hate him. I love Dave Ramsey. Dave Ramsey is trying to look up to, does a great job of presenting information. 

[00:13:32] Jeb Smith, Huntington Beach Realtor: Actually, you would not look up, you would look down. He’s like five.

[00:13:34] Josh Lewis, Certified Mortgage Consultant: You know, you know what I’m saying? Figuratively, not literally. But from that perspective, he’s done a lot of good for a lot of people, but on this note I believe he’s blinded by the fact that he has a relationship with one specific mortgage company that anyone who inquires with him gets referred to that he has an advertising arrangement with.

And with that, he says, Hey, don’t worry about having a credit score. If you don’t use any credit, you pay off all your debt, you can still get a manual underwrite. You can still get a loan. Is that true? In theory, it is. And if you go to his company that he suggests, they work with that. But the reality is that loan is worth less in the secondary markets. You will be paying a premium for that.

So not only a premium for your mortgage, if you do not have a credit score, you will pay a premium on everything in life. You move to a new apartment, you move to a new house, you want to get your utilities set up. You’re going to make a deposit. You call and get insurance on your car. You’re going to pay a higher rate.

So to me, it’s incredibly short sighted advice to say, Hey, just so you don’t get into any trouble with debt, we’re going to have no debt and no credit score. In this issue, it’s very rare that we have someone that has no credit score, but let’s start with that. If you had no credit score. And you found a lender on a Fannie Mae Freddie Mac loan who will do a manual underwrite with no credit score.

That is very rare, but they are still going to have to then [00:15:00] start by developing an alternative credit history. You’re going to be providing a history of paying your rent, paying your utility bills, all sorts of things that are not necessary when you have a credit score and you have an automated underwrite.

So without going too far down the rabbit hole of what it means for every program, if you have no credit score, you’re going to have to come up with an alternative credit history. Fairly easy. FHA, VA, USDA, not easy, I say fairly easy. But I made several calls knowing we were going to do this episode.

We have about 70 different wholesale lenders that we work with, meaning that we can either broker loans to or fund loans and sell them to. And I found no one who would do a manual underwrite on a conventional loan for someone without a credit score. It’s just, it’s very hard to find. So your options are going to be limited. And obviously you are going to pay a premium in that interest rate. 

So from that perspective, it’s not that hard to get a credit score. People with no credit history can get a credit score within 90 to 180 days. If you think you are going to buy a house, we probably should do a video on that Jeb, how to get from zero credit score to an acceptable credit score so you can get the most options and the best terms on your loan.

But let’s think more of this as someone who has that 585 credit score. And they want to do a three and a half percent down FHA. And we cannot get an automated approval. What changes in this situation where we’re going to a manual underwrite?

We talked about a little at the top of the show, Jeb, you’re going to be limited. You’re going to have a lower debt to income ratio. We’ve probably gone over a hundred times on an FHA loan with an automated approval, it will generally let us go up to 46.99% housing to income ratio and a 56.99% total debt to income ratio, the max you’re going to be able to get to with a manual underwrite is 40%/50%. And it’s even lower in some situations. 

Don’t want to go down the rabbit hole into every possible permutation of what this looks like, but it’s going to be lower. We’ve talked about on the show, Jeb many times, VA, you can go as high as I got one approved this week with over a 70 percent debt to income ratio. That will not happen on a manual underwrite. 

Now, VA does not post a specific guideline that says this is the max for a manual underwrite. Most lenders won’t let you go over a 50. We have a handful of them that will let you go as high as a 60. And largely you may be asking how what are they basing that off of that you can’t get an automated approval, but you can go as high as a 60 percent debt to income ratio. 

VA relies heavily on the residual income calculation. So they’re running that residual income calculation saying you have enough money left after all your bills are paid that you can pay this mortgage, put food on the table, take care of your family.

So those are the big things that you’re looking at is you’re going to be limited to a lower debt to income. Many times you will need Jeb to have reserves, post closing reserves. So however much money we say. Here’s your down payment. Here’s your closing costs. Here’s how [00:18:00] much you have to bring in at closing. You’ll have to have 1 to 2 to 3 months of post closing reserve. 1 to 2 to 3 months of your total payment. Principal, interest, taxes, insurance, HOA, if any.

Big picture what I think everyone needs to take from this episode is yes, manual underwriting is a tool. It is possible. But there are some pretty severe limitations and we want to avoid it if at all possible just to make a smoother, easier, simpler, more certain process for you as a buyer and for your Realtor and the sellers and their representation on that side.

[00:18:35] Jeb Smith, Huntington Beach Realtor: So how can you avoid it? Really I think that’s the question that a lot of people want to know. And I think the easy answer, is focusing on improving your credit score. For the credit situation, you know I asked early in the episode where do you see people fall in this manual underwrite more than anything else?

And more or less a credit related. And I think about that and as you’re talking and think, you know, FHA allows as low as a 500 credit score with up to 10 percent down. And I think about that and people go I have a 500 credit score, I’ve got 10 percent down, therefore I must qualify.

You meet the basic guidelines. There’s no world in which you’re going to make the automated underwriting on that file. That is going to be a manual underwrite situation. And a 500 credit score in no world is a good credit score. And should you be buying a house? That’s difficult to say because we don’t know what got you to a 500 credit score. But where you can avoid being in this situation is improving your credit. Right? 

We talk about two things. If you’re in the position at the moment, you’re just listening to this, trying to become the educated home buyer, but you’re six months, a year out from doing this, where can you focus your time and attention? Two areas really. 

Credit affects your monthly payment more than anything else. It affects your ability to qualify whether or not you’re ever going to be able to buy a home for one. Along with income and some other things, but credit affects the rate that you get, which ultimately impacts your score. And so the higher your credit score is, the better the ability that you’re going to meet some automated underwriting.

And, or even if you don’t, the better the chance that a manual underwrite happens. You got good credit, you meet the other qualifications, then you’re in a better position to buy a home. So down payment, credit score are really important when it comes to buying a home. 

[00:20:15] Josh Lewis, Certified Mortgage Consultant: Let’s underscore the second piece you said there, down payment. With a big down payment, we can get really awful loans an automated approval because that algorithm is designed to measure the risk to the lender. What is the risk of the default? And if there’s a default, what is the risk of a loss to you as the lender? 

So I’ve had people with atrocious credit scores. Like you said, Hey, you have a 500 credit score. You can do an FHA with 10 percent down per the guidelines, but you’re never getting an automated approval. You might, but you would probably be putting 50 percent down, if you were. That minimum 10 percent down, which in that situation with that credit score is minimum. The file is not going to present to that algorithm in a way that you are likely to get approved.

But with a big enough down, now we’ve removed the risk to the lender. So from that perspective, [00:21:00] absolutely optimize, maximize your credit score. And it’s an interplay. When we see these refer, the rejected files that don’t get an accept finding that get a refer, it’s either just credit score related or an interplay of credit score and debt to income.

So there are only two ways to fix debt to income, reduce debt, reducing the debt may increase your credit score. But also improving your income if that is possible. You know, that’s not something that generally happens. You know, if you could make 10 percent more money, you probably would be, you wouldn’t go, Oh, wait, I want to buy a house. Let me go make sure I increase my income 10%. 

I think we’ve covered most of this Jeb. One point that I didn’t want to throw out there is specifically with FHA, there are situations where you can get an automated approval, but it is required to be manually downgraded. 

A few of these:

a thousand dollars or more of disputed derogatory credit accounts 

bankruptcy within two years of the case number assignment 

foreclosure deed in lieu of a foreclosure or short sale within three years of case assignment. 

Those generally show up in the credit report and are seen by the automated system, but sometimes they don’t report accurately. So if something is on the credit report, the timelines don’t add up, you may get an approve eligible on a file that’s not. It actually has to go to a manual downgrade. 

Now, there are exceptions on those, but that exception has to be made by a human and not by the system. 

Payment history on FHA on a purchase if you had more than three 30 day lates in the last 12 months on a mortgage, if you had a one time 60 plus one times 30 or more 

[00:22:34] Jeb Smith, Huntington Beach Realtor: Explain what that means, Josh. 

[00:22:35] Josh Lewis, Certified Mortgage Consultant: 30 days. So one times 30 day late. So in that initial situation, three 30 day lates in the last 12 months in and of themselves will make you ineligible.

But if you had one 60 day late and another 30 day late. Or two 30 day lates, or five 30 day lates, problematic. And any 90 day late in the last 12 months. Doesn’t say you can’t be approved. There’s an automatic manual downgrade regardless of what the automated system says. 

[00:23:01] Jeb Smith, Huntington Beach Realtor: And I wanna take this one step further because back in the day when I did loans, I would have this conversation, Hey, do you have any lates? And people would say. Yeah. I paid my mortgage late. That’s not what it means. 

You have a 15 day grace period with your lender to pay your mortgage before a late fee is attached to that mortgage payment, typically speaking. Right? So as long as you pay it before the 15th of the month, there’s no late fee attached. After the 15th, there’s a late fee, but it still hasn’t hit your credit yet until after 30 days. Once you’ve gone 30 days after the payment was due is when it starts reporting to the credit bureaus and it will start affecting your score. 

So even if you can’t make a payment on the first, but you’re able to make it by the end of the month, it’s super important that you do that and don’t wait until the following month because then you start having rolling 30 day lates and other things that ultimately affect your credit.

And you know, people look at it a little bit different ways, but it’s just. A lack of understanding how it works. So 

[00:23:54] Josh Lewis, Certified Mortgage Consultant: It’s a huge misconception Jeb. People will tell me all the time. Oh yeah. You know, a few months back I did, I had a late [00:24:00] payment. Okay. What do you mean by that? I paid it on the 20th and I had to pay $150 late fee.

We go, okay, not good. But in terms of reporting until you are 30 days late, nothing’s going to hit the credit report. Underwriter has no way of ever seeing that. So we want to avoid it in the future. You don’t want to pay unnecessary late fees, but you’re good from our perspective and it shouldn’t impact your credit score.

So a couple of additional things we talked about what might you have to do on a manually underwritten loan that you wouldn’t otherwise have to do? Almost always with a manual underwrite, we’re looking at a full two years of income. Certain loan programs with an automated approval we can go one W2, one tax return if the tax returns required.

These are almost always going to be two years. Something that back in the nineties, when I started doing loans, every file we were writing letters of explanation. Letter of explanation for this inquiry, letter of explanation for this late, letter of explanation of why we have this collection account.

With modern automated underwriting it generally says, Hey, I see it. I’ve analyzed it. I don’t care about it. On a manually underwritten file we’re going to explain all of those crazy bad things that happened in there, no matter how small or trivial they may look to you. 

The last one that is probably a really important one for us to cover here, Jeb, is the concept of compensating factors. When we said you could, in certain situations, go to a 40 housing to income 50 percent debt to income ratio on an FHA. 60 on a VA. 

You cannot do that without compensating factors. And what are those? There are things that are not required in a loan with an automated underwrite, but positive factors in your favor that we can point an underwriter to, to say this is why this is a good risk.

FHA’s list is really short. I’ll actually read you the entire list and then VA’s is longer and it pretty much mirrors this just in a little bit more detail. So FHA, what could be a compensating factor?

Verified and documented cash reserves. Yeah, you’re only doing three and a half percent down, but you’ve got $150,000 in the bank or in a 401k. That’s a good, that’s a positive thing. Less risk to the lender.

Minimal increase in housing payment. You’ve been renting a house for $2500 a month, and your new mortgage payment is $2600. Hey, we can show with the 12 month canceled checks you’ve been happily and successfully paying $2500. $2600 shouldn’t be too much trouble for you.

Significant additional income, not reflected in effective income. So we’ve talked before on the show. What could this be? Someone got a second job a year ago. We don’t have the two year history of it, but we have, they make an extra $3000 a month at their second job. We can’t use it in qualifying income, but we know that it’s there and it’s going to help pay the bills.

[00:26:30] Jeb Smith, Huntington Beach Realtor: Bonuses, commissions, that sort of thing. Does that also qualify in that Josh? 

[00:26:35] Josh Lewis, Certified Mortgage Consultant: Only if they’re not eligible to be used as qualifying income, right? So absolutely we have bonus income or overtime, but we don’t have the two year history of it. But we see it. We see you’ve got it for a year, and we know that it’s additional income.

Residual income. We know that VA always relies on that. FHA doesn’t. But if we do the same calculation and can show them, Hey, we meet this residual income requirement.

VA adds a few to that. An excellent credit history. If we have an excellent credit history, we’re probably [00:27:00] not going to be looking at manual underwriting. Conservative use of consumer credit, minimal consumer debt, long term employment. You’ve been in your job for 25 years. Again, reduces risk to the lender.

Bigger than required down payment. Existence of equity and refinancing. So we talked about that. If there’s more equity in the home or you’re making a bigger down payment, less risk to the lender. They’re more likely to approve it.

Little or no increase in shelter expense. Same as the increase in the monthly payment. Satisfactory home ownership experience in the past. You’ve been a homeowner before and you didn’t lose the home. Low debt to income ratio. Tax credits for child care that aren’t really used in qualifying, but we can document them.

Tax benefits of homeownership, which we actually did an episode on that. There aren’t that many of them, so I don’t know how well we would be able to document that. But those are the things that we would want to point out if we’re trying to go to as high a debt to income ratio as possible with a manual underwrite.

[00:27:48] Jeb Smith, Huntington Beach Realtor: No, it’s good stuff. Ideally you don’t want to be in the manual underwrite camp if you don’t have to be. Ideally, you’d like to be able to get through that automated underwriting system, Josh. But jumbo loans that don’t meet a basic loan requirements. Are those something that that get an approve eligible when they go through or are most of those manually underwritten?

[00:28:05] Josh Lewis, Certified Mortgage Consultant: So most jumbo loans are manually underwritten. I would say some, not necessarily many, but some. A not insignificant amount of jumbo programs will want you to have that Fannie Mae automated underwrite in the file. And it’ll be approve ineligible because it exceeds the County loan limits, but they still want to see that the automated underwriting system liked all of the other details of it.

Some jumbo lenders have created their own automated underwriting system. Most of them are a manual underwrite from the very beginning. So still old school, like back in the nineties, where an underwriter is going through and determining that everything meets the qualifications versus just relying on the automated even if the automated is also required. 

[00:28:45] Jeb Smith, Huntington Beach Realtor: Yeah. And the reason I brought that up, cause I, quite frankly, I, that’s the way I remembered it, but what wasn’t a hundred percent sure. So there’s some cases where there’s no way around it. There’s going to be a manual underwrite on the file. But underwriter is always looking in the file, regardless of it’s a manual underwrite or an automated file, right?

They’re still checking all of this documentation. It’s just a finer tooth comb with the manual underwrite. Like Josh said, making sure you meet the basic requirements, you have the compensating factors, and then really looking at the big picture and saying, is this person, in a position to buy a home based on what we see here?

Is this a sellable loan on the other side? It’s really an important piece of it as well, because, most lenders aren’t going to take on a loan that they can’t sell on the secondary market otherwise it’s stuck on their books. And creates issues. Just things that lenders don’t want to take in.

So I feel like that was a really good breakdown there, Josh. Like you mentioned earlier, this episode came about because people ask the question of manual underwriting. What is it? Can we explain it? 

So I’m asking you now as listeners of the show, is there something we haven’t covered or that we’ve covered maybe previously, or just not in enough detail where you want a further explanation. If there is, if you’re watching on YouTube, comment in the video below. If you’re listening online, you can also comment through the app that you’re listening to probably, or you can send us an email [00:30:00] directly and we’d be happy to to take that into consideration so that we can again, help you become the educated home buyer. 

So Josh. Anything we’re missing here on the manual underwriting front that you want to add? 

[00:30:09] Josh Lewis, Certified Mortgage Consultant: I think we close the loop with this. I do a handful of these in a year. Less than 10, significantly less than 10. Say some years it’s two or three, some years it’s five, six, seven. This is not something that should come up all the time. 

And if you are not able to get an automated approval, it should give you pause to think why is that? And is that reason a valid reason to maybe delay this until I can get an automated approval?

So obviously there are situations where you can successfully become a borrower slash home owner, if you’re buying versus refinancing, where this is necessary. And it is the one way we had. A timeframe, six, 12, 18 months that we went through something that is in the past. And we’re going to do a refinance to move beyond it.

Or we’re going to buy a home that’s going to give us a better financial future for our family to move forward and improve our finances. But just be honest with yourself. It’s never to say that a manual underwrite is the wrong move. It’s just, there’s some restrictions here and we might want to ask ourselves, are the issues that are preventing me from getting an automated approval unlikely to recur? In which case, if the time is right, go ahead and buy.

Or do we say, Hey, let’s make sure over the next six, 12 months, we can put ourselves into a position where we can get an automated approval and get the absolute best terms and make sure we’re on solid footing. 

The most important thing we talked about here, Jeb is over the long haul. Most people want to, and should become a homeowner. It doesn’t mean everyone at all times. And this specific subset of people just have your loan originator walk through with you, why am I not getting an automated approval? From your perspective, is it reasonable that I should buy?

And then go through that with your family, your significant other, whoever is an important decision maker there, and just make sure that you’re being honest with yourself and now is a good time for you to step into the market and successfully borrow and repay that mortgage. 

[00:31:57] Jeb Smith, Huntington Beach Realtor: I think that’s well said. Always fall back on the slogan here of the show which is Buy Right, Borrow Smart and Build Wealth. Focus on the things that you can control. Credit, down payment, that sort of thing to put yourself in the best position so that when you’re ready to buy you have that foundation to build off of.

But if you found any value in today’s episode, do us a favor, hit that thumbs up. If you’re on YouTube, if you’re on Spotify or Apple or podcast online, you can rate us and review us all of that helps. But until next time, adios 

[00:32:23] Josh Lewis, Certified Mortgage Consultant: amigos. [00:33:00] 

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