In the mid 1990’s, the mortgage industry saw the credit score and its predictive power to evaluate a borrower’s ability to repay a mortgage step into the limelight as three of the most indicative factors for loan approval. After conducting statistical check after statistical check, Fannie, Freddie and Ginnie, the 3 big lending institutions, mandated that the credit score should be used in conjunction with manual underwriting to evaluate loan approval. Not long after, automated underwriting systems (AUS) were developed that expedited and streamlined the underwriting method even further for lenders. A loan officer today basically inputs a borrower’s key information into the preferred underwriting automatic engine, such as his/her credit score, income, amount being borrowed, money reserves, employment and housing history, and the value of the property. A response is returned by the underwriting engine recommending approval or denial for the loan.

If your loan receives a denial from an AUS, the buck doesn’t necessarily stop there. Life happens to people, and oftentimes it’s going to take a real live person understanding the nuances of a file to make an underwriting decision. That’s when your lender may suggest submitting your file to underwriting for a manual review. After all, not everything in life can be automatic, right?

“The most typical reason they see a file submitted to us for manual underwriting is for either no credit score or an error reported on a credit report,” reflects Patricia Haynes, onsite Government Underwriter at Mortgage Investors Group. “For instance a judgement that doesn’t belong to the borrower. Maybe it’s Dad’s judgement reflected on the son’s report because Junior and Dad have the same name. That’s when I can overwrite an AUS decision because i've the documentation to support my decision to do so in front of me.”

A perfect scenario for a physically underwritten file would be someone who has no credit scores. No credit scores? Yes, it is possible. I’ve had customers who, being old school and always having paid for everything in money, had rarely established traditional credit lines that reported to credit reporting bureaus. In a case such as this seven, I had to submit non-traditional lines of credit to underwriting, something a machine can’t evaluate. This means I had my customer bring in bills he had paid on time for the past year to create a credit history. Typical ones used are automobile insurance, utility bills, cell phone bills and cable bills. You can expect to have to provide 3-4 different trade lines if you haven’t established a traditional credit history and score.

Another very common reason to submit a loan for a manual underwrite is when your customer’s credit score is below 620 and gets an AUS denial. If this is the case with your loan, be prepared to provide more than average documentation about your credit history, as well as written explanations as to why your credit score has suffered recently. Maybe two years ago you had a financial meltdown due to a medical illness, but in the last twelve months, you can prove you are back on your game and have been repaying debt. However, your credit scores haven’t exactly caught up with your actions. An underwriter is going to piece together the different aspects of your file and see if it makes sense. Your home lender should be able to review your file and guide you as to what documentation an underwriter will want from you to grant you loan approval.

Naturally, if your credit score is low and you have very little explanation for your state of credit affairs other than you failed to pay your bills on time, don’t hold your breath for loan approval. An underwriter can see through smoke and mirrors. After looking at files as long as they have, they can basically sniff out a loan that has merit from the ones that are risky.

So, even as our world gets more and more automated every day, it’s lovely to know that you can’t replace genuine common sense, even in the mortgage industry. and it’s lovely to know that you can plead your case for credit worthiness to a real live human being.