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.

I saw a cartoon the other day that was funny, but also sad when you think about it. It showed a couple sitting across from a mortgage lender, and the caption read, “We’re here to apply for a tank of gas.” With increases in prices for just about everything, it gets more and more difficult to stash away a nest egg for a down payment. And much every loan requires some part of down payment, even if you get a 100% financing loan. After all, you still are generally going to be required to put down some earnest money on your contract and in most cases, pay for an appraisal up front. You may have been trying to save it up on your own, but it may be time to accept some help from your relatives.

Most loan programs, be it Conventional, FHA, VA or Rural Housing, need the borrower to pay for something. In particular, FHA and Conventional home purchases need a maximum of 3% to come out of the borrower’s pocket. If you're doing a Conventional loan, you still can’t receive a gift for your 3% down payment, but you can use a gift to help with closing costs. However, FHA will permit your source of down payment to be a gift. So, if you find yourself a bit short on funds, you may need to ask someone to gift you the down payment or closing costs (or if your lucky, and it’s allowed – both!).



All lenders are particular about just who can give you a gift for your down payment or closing costs. much across the board, the gift must be from a blood relative. You may have to prove that the gifter is a relative thru birth certificates, christening records, etc. bizarre but true. Conventional loans will also permit an employer to give you a gift. But in any case, the most important factor is that whoever is giving the gift does not expect to be paid back. A certification to that effect will be required to be signed by the donor. Otherwise, it’s a loan, now isn’t it? And as a responsible lender, we’re going to include that payment in your debt to income ratio, and we’ll probably need a bunch of documentation to prove the terms, etc. So, make sure it truly is a gift.





As of the date I’m writing this piece of writing, FHA will permit for down payment assistance programs, such as Nehemiah or Ameridream. Lenders view these products as “gifts” in a sense. they are basically seller concessions funneled through the down payment assistance channels. However, by the time this article is published, they may be null and void. It’s currently being reviewed and could go away. Or it may still be there, but just know it’s under review.



Lenders are particular about how the gift money reach the closing table. If you deposit the gift before closing, you have to show it coming out of the donor’s account and depositing into your account. It’s a lot of paper to collect. The easiest method is for Grandpa or your Great Aunt to just send a cashier’s check payable to you and your title company to the closing table. Smoother, quicker, simpler.

Gifts are a wonderful thing, and a gift of a down payment is a useful gift. After all, I think it’s safe to say that homeownership is eight gift that keeps on giving, wouldn’t you?