You’ve worked long hours, you’ve put up with bad bosses, you’ve worked weekends, and you’re finally ready to buy your dream house. Underwriting is the process of evaluating whether a borrower is able to repay a mortgage loan based on their financial history, employment history, debts, assets, and credit reports. An underwriter will approve or deny a mortgage loan based on how likely a borrower is to meet their financial obligations in the future. There are 2 types of underwriting: automated and manual. Both follow a different mortgage underwriting process and have their own uses; however, manual underwriting has been given a bad rap over the years. Let’s explore why this is the case in more detail.
The underwriting process requires underwriters to gather disparate data from different channels, manually enter that data into spreadsheets, complete their calculations, review the plethora of documents manually, and finally come to a decision. This entire process is document heavy and so takes an inordinate amount of time, if it is to be a high-quality mortgage loan. Because of the amount of information involved and the number of factors that need to be seriously considered before coming to an accurate decision, the rate at which these loans are produced is very slow. As such, manual underwriting is terribly inefficient and can take months to complete.
The mortgage underwriting process involves many tasks from verifying the authenticity of documentation or calculating their debt-to-income ratio to evaluating their credit history for any red flags. All it takes is for the underwriter to hit one wrong key during this arduous process for the entire file to be compromised. This incorrect credit decision would then be scrutinized and deemed faulty in terms of compliance, and the entire business could be highly penalized, if not shut down, as a result. Therefore, manual underwriting is considered to be highly inaccurate because of the sheer number of errors involved on a regular basis.
The manual underwriting process takes a lot of time because of how meticulous the underwriters have to be in coming to their decision after having considered hundreds of variables that might affect a borrower’s ability to repay a loan. It takes an entire department of them to underwrite enough loans to stay in business. As a result, when compared to automated underwriting, manual underwriting can be very expensive. The overhead costs for buildings and equipment, payroll expenses, and hiring and training costs can be considerable. As a result, manual underwriting is not considered as cost-effective as automated underwriting.
Loan Underwriting Pros for Manual Underwriting
Although automated underwriting can expedite the screening process for mortgage loans, it is rule-based and cannot take into consideration important variables outside the algorithm. It is easy for automated underwriting to follow simple yes/no instructions, however, qualitative measures are ignored. For example, if a particular borrower recently switched jobs from working at an SME to a Fortune 500 company, the computer would instantly deny the loan because switching jobs means that the income for that individual is unstable and a risky bet for the lender. With manual underwriting, however, qualitative assessments and extenuating circumstances could be taken into consideration and the loan possibly approved because this change in job status positively affects their income level and therefore their ability to make mortgage payments in full.
Although automated underwriting rules the roost in the mortgage lending world because of its speed, efficiency, and accuracy – it is not necessarily the best loan underwriting process available. Manual underwriting, too, has its place when non-numerical measures of risk are involved. It simply needs to be supported by the right process efficiencies that come with automated loan underwriting for better underwriting decisions to be made. Manual underwriting is also good for mortgage applications that require greater scrutiny and a more meticulous assessment because of a more complex borrower profile. To answer the question of whether manual underwriting is bad or not, the right answer would be that it depends on what kinds of factors need to be evaluated and how complex the risk profile of the borrower happens to be.