The Automated vs. Manual Underwriting Process: Which is Right for You?

If you're in the market for a new home or looking to refinance your existing mortgage, you may be wondering about the underwriting process.

Specifically, you may be curious about the differences between automated and manual underwriting.

While both methods are used to determine your eligibility for a loan, they each have their own pros and cons.

Automated underwriting relies on computer algorithms to analyze your financial information and determine your creditworthiness.

It's a faster and more cost-efficient process than manual underwriting, which involves a human underwriter reviewing your financial documents and making a decision based on their professional judgment.

However, automated underwriting may not take into account certain nuances of your financial situation that a human underwriter would catch.

On the other hand, manual underwriting can be a more thorough and personalized process.

A human underwriter can take into account factors that a computer algorithm may miss, such as irregular income or nontraditional credit sources.

However, the manual underwriting process can be more time-consuming and may result in a higher chance of human error.

Ultimately, the choice between automated and manual underwriting will depend on your individual financial situation and priorities.

Understanding Underwriting

When you apply for a loan, the lender will assess your creditworthiness to determine whether they should approve your loan application.

This process is called underwriting. There are two types of underwriting: automated and manual.

Automated Underwriting

Automated underwriting uses software to analyze your financial information and credit history to determine your creditworthiness.

The software can quickly analyze large amounts of data and provide a decision within minutes. This process is more efficient and faster than manual underwriting.

Automated underwriting is commonly used for mortgage loans, but it can also be used for other types of loans such as personal loans, auto loans, and credit cards.

The software looks at several factors such as your credit score, income, debt-to-income ratio, and employment history to determine your creditworthiness.

Manual Underwriting

Manual underwriting is a more traditional approach to underwriting. A human underwriter will review your financial information and credit history to determine your creditworthiness.

This process can take longer than automated underwriting, but it allows for more flexibility in the underwriting process.

Manual underwriting is typically used for borrowers with unique circumstances such as those with limited credit history, self-employed individuals, or those with a history of bankruptcy or foreclosure.

The underwriter will take a closer look at your financial information and may require additional documentation to support your loan application.

In general, automated underwriting is faster and more efficient, while manual underwriting allows for more flexibility and personalized attention.

The type of underwriting that is best for you will depend on your individual circumstances and the type of loan you are applying for.

Benefits and Drawbacks

When it comes to deciding between automated and manual underwriting, there are advantages and disadvantages to both approaches.

In this section, we will explore the benefits and drawbacks of each method to help you make an informed decision.

Advantages of Automated Underwriting

Automated underwriting systems (AUS) have gained popularity in recent years because of the speed and efficiency they offer.

Here are some of the benefits of automated underwriting:

  • Faster turnaround time: Automated underwriting systems can process loan applications much faster than manual underwriting, which can save time for both lenders and borrowers.
  • Consistent decision-making: Automated underwriting systems use algorithms to evaluate loan applications, which means that decisions are made based on objective criteria rather than subjective human judgment.
  • Lower costs: Automated underwriting systems can help reduce costs for lenders by eliminating the need for manual underwriters.

Disadvantages of Automated Underwriting

While automated underwriting has many benefits, it also has some drawbacks that you should be aware of:

  • Less flexibility: Automated underwriting systems are designed to evaluate loan applications based on specific criteria, which means that they may not be able to consider unique circumstances or exceptions.
  • Lack of human touch: Automated underwriting systems are entirely computer-based, which means that they lack the personal touch and relationship-building that can come with manual underwriting.
  • Potential for errors: Automated underwriting systems rely on algorithms to make decisions, which means that there is a risk of errors or inaccuracies.

Advantages of Manual Underwriting

Manual underwriting involves a human underwriter evaluating loan applications and making decisions based on their judgment and experience.

Here are some of the benefits of manual underwriting:

  • Flexibility: Manual underwriting allows for more flexibility in evaluating loan applications, which means that underwriters can take unique circumstances into account.
  • Personal touch: Manual underwriting involves a human underwriter who can build a relationship with borrowers and provide a more personalized experience.
  • Less risk of errors: Manual underwriting involves a human underwriter who can catch errors or inaccuracies that may be missed by automated systems.

Disadvantages of Manual Underwriting

While manual underwriting has its benefits, it also has some drawbacks that you should consider:

  • Slower turnaround time: Manual underwriting can take longer than automated underwriting, which can be frustrating for borrowers who need a quick decision.
  • More subjective decision-making: Manual underwriting involves human judgment, which means that decisions may be more subjective and less consistent than those made by automated systems.
  • Higher costs: Manual underwriting can be more expensive for lenders than automated underwriting because it requires more resources.

Overall, both automated and manual underwriting have their advantages and disadvantages, and the best approach will depend on your specific needs and circumstances.

It's essential to consider all factors carefully and choose the method that will work best for you.

Factors to Consider When Choosing

When deciding between automated and manual underwriting, there are several factors to consider to determine which process is best for you.

Loan Type

The type of loan you are applying for can play a significant role in whether automated or manual underwriting is used.

Automated underwriting is typically used for conventional loans, while manual underwriting is more common for government-backed loans such as FHA and VA loans.

Credit History

If you have a strong credit history and a high credit score, automated underwriting may be the best option for you.

Automated underwriting systems rely heavily on credit scores and can quickly approve borrowers with excellent credit histories.

On the other hand, if you have a limited credit history or a low credit score, manual underwriting may be necessary to assess your creditworthiness.

Income Verification

Automated underwriting systems require less documentation for income verification, relying on tax returns and W-2 forms to verify income.

However, if you have non-traditional income sources or are self-employed, manual underwriting may be necessary to verify your income.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is an important factor in determining your eligibility for a loan. Automated underwriting systems have strict DTI requirements, and if your DTI ratio is too high, you may not be approved.

Manual underwriting may be a better option if you have a high DTI ratio, as it allows for more flexibility in assessing your overall financial situation.

Overall, the decision to use automated or manual underwriting will depend on your individual circumstances. Consider your loan type, credit history, income verification, and debt-to-income ratio when deciding which process is best for you.

Conclusion

In conclusion, the choice between automated and manual underwriting depends on your specific situation.

If you have a good credit score and a straightforward financial history, automated underwriting may be a good option for you as it is faster and more cost-efficient.

However, if you have a poor credit score or a more complex financial history, manual underwriting may be the better option as it allows for a more personalized and thorough evaluation of your financial situation.

It is important to note that both automated and manual underwriting have their advantages and disadvantages.

While automated underwriting is faster and more cost-efficient, it may not take into account certain nuances in your financial history that could impact your creditworthiness.

On the other hand, while manual underwriting is more personalized and thorough, it can be more time-consuming and expensive.

Ultimately, it is up to you to weigh the pros and cons of each option and decide which one is best for you. If you are unsure, it may be helpful to speak with a financial advisor or a lender to get their opinion on which option would be best for your specific situation.

Remember, the underwriting process is an important step in obtaining a loan or mortgage, and it is important to take the time to understand your options and choose the best one for you.

Frequently Asked Questions

What are the differences between manual and automated underwriting?

Automated underwriting is a process that uses computer algorithms to evaluate a borrower's creditworthiness and determine whether to approve a loan.

Manual underwriting, on the other hand, involves a human underwriter who reviews the borrower's application, credit history, and financial documents to make a decision.

What are the advantages of manual underwriting?

Manual underwriting allows for more flexibility in evaluating a borrower's financial situation. It can be beneficial for borrowers who have unique circumstances, such as self-employment income or non-traditional credit histories.

Manual underwriting also takes into account factors that automated underwriting may not, such as a borrower's character and potential for future income growth.

What are the disadvantages of automated underwriting?

Automated underwriting relies solely on algorithms, which can lead to decisions that are not always accurate or fair.

It may not take into account certain factors that could impact a borrower's ability to repay the loan, such as a recent job change or medical expenses.

Automated underwriting also tends to favor borrowers with traditional credit histories and may not be as accommodating to those with non-traditional credit or limited credit history.

What are the requirements for manual underwriting?

Manual underwriting typically requires more documentation than automated underwriting.

Borrowers will need to provide detailed financial statements, tax returns, and other supporting documents to help the underwriter evaluate their creditworthiness.

Manual underwriting may also require a higher credit score and a lower debt-to-income ratio than automated underwriting.

Which mortgage companies offer manual underwriting?

Not all mortgage companies offer manual underwriting, but some do. It's important to do your research and find a lender that specializes in manual underwriting if you believe it may be the best option for you.

Some lenders that offer manual underwriting include Churchill Mortgage, New American Funding, and Carrington Mortgage Services.

Is manual underwriting better for borrowers with no credit score?

Manual underwriting can be a good option for borrowers who have no credit score or limited credit history.

A manual underwriter will evaluate the borrower's financial situation more holistically, taking into account factors such as rental payment history, utility bills, and other non-traditional credit sources.

However, borrowers will still need to provide detailed financial documentation to help the underwriter make a decision.