Most loan applications submitted in today's environment are underwritten electronically. The loan application is run through an automated underwriting system and within moments a decision is reached. The wording will either be 'approved/eligible' or 'approve ineligible.' The eligible part indicates the file is eligible to be sold in the secondary market. When a loan falls outside of the approved/eligible, the loan can still be reviewed with a 'manual' underwrite.

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A manual underwrite simply means the lender's underwriter reviews the loan file directly without the aid of an automated approval. A manual underwrite is often issued when the loan doesn't get an automated approval but is still eligible to be approved and sold. The next step after this stage is a 'refer/caution' which means the application cannot be approved for the submitted loan. For instance, an applicant has applied for a loan with a bankruptcy in the past but has not met the minimum waiting period. This will trigger the refer label.

For loans that do qualify for a manual underwrite, it simply falls back to approval and processing standards used prior to automated underwriting systems. The lender will then ask for full documentation of income, assets and employment. Paycheck stubs and W2s will be needed. If self-employed, two years of income tax returns, personal and business, will be required. Bank statements from the accounts used for the down payment and closing costs will also be requested.

Lenders want to see at least two years of employment. This is one of the reasons the most recent two years of W2s are being asked for. This really is something that cannot be overcome but a hard and fast rule. The paycheck stubs will be compared to the W2s to make sure they match up with what appears on the paycheck stubs. Bank statements are also used to match up the income that appears on paycheck stubs with deposits from the employer. For example, if you get paid on the 1st and 15th, lenders will want to see deposits appearing in your account on or around those dates. If there are other deposits that cannot be explained, that income can't be used. If there is a financial gift involved from an approved source, there should also be an accompanying 'gift letter' that clearly states the amounts are a gift and not expected to be paid back.

The underwriter will go down the list, item by item, making sure what was submitted matches the guidelines for the loan program being applied for. Once income, assets and credit has been evaluated and the lender determines the application is approved for sale in the secondary market, the approval is issued via the manual underwriting process.