If you have ever received a VA loan pre-approval, chances are it was from an automated system. Most lenders run your loan application through an AUS or Automated Underwriting System by default. What happens if the system kicks the application out and denies it, though? There’s still a chance of manual underwriting. In other words, a human will go over the application and qualifying factors to make a decision.
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So when do VA loans get sent to a human underwriter? It generally occurs when the automated underwriting system gives the file a ‘Refer’ status. This means to refer it to manual underwriting. Let’s look at the difference between human and automated underwriting.
What Does Automated Underwriting Mean?
VA lenders use both the Fannie Mae and Freddie Mac automated underwriting system. With these systems, lenders enter your personal identifying information so the program can pull your credit. The lender also inputs your other qualifying factors, such as your gross monthly income and assets. The system then uses the factors to determine if you qualify for the loan. Since it’s automated, the system uses an algorithm. There’s no working around the system or granting exceptions.
If you receive an approval, it will be an ‘Approved with Conditions.’ In other words, you are conditionally approved for the loan, otherwise known as a pre-approval. It’s now the lender’s responsibility to verify all of the factors you provided by asking for appropriate documentation and evaluating it.
What Does Manual Underwriting Mean?
In some cases, you might see a ‘Refer’ status from the AUS. This means a human underwriter should look over the file. The automated system saw potential in the file, but there was a red flag that kept it from giving an approval.
When a human underwriter looks at the file, they have specific guidelines they must follow. This includes a 41% maximum debt ratio. This may seem unfortunate since the automated system can often approve loans with a DTI of up to 50%. This only happens when there are compensating factors that the system can recognize though.
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When a human underwriter views the file, they too will ask for compensating factors. They do so after figuring out what ‘red flag’ prevented the automatic approval. For example, is your credit score lower than 620? Is your debt ratio high? Is your employment unstable? The lender will pinpoint the issue and then look for compensating factors that include any of the following:
- Mortgage reserves
- Stable employment with steadily increasing income
- Excessive disposable income
- One-time credit issues that you have resolved and overcome
Any evidence you can provide the lender with showing that you are a responsible borrower can help. If you had any credit issues, write a good Letter of Explanation. Let the lender know why it happened and include proof of the incident and that you overcame it. It helps if you can explain the situation as a one-time occurrence as a result of circumstances outside of your control. For example, did you fall ill and fell behind on your bills? Did your company close, leaving you without a job? These are situations that a human underwriter can understand and grant an exception as long as you prove you overcame the issues and have since been a responsible consumer.
Manual underwriting gives you another chance at approval on a VA loan. Not all lenders offer this service, so make sure you shop around if you are with a lender that won’t offer this service. Having a human review your file gives it a better chance of approval when you have circumstances that a computer just cannot understand because it falls outside of its algorithm.
