2017 FHA Manual Underwriting Guidelines And Compensating Factors Updates

2017 FHA Manual Underwriting Guidelines And Definition Of Compensating Factors Explained

There are no dead set in stone requirements with 2017 FHA Manual Underwriting Guidelines. Manual Underwriting is when a mortgage loan applicant cannot get an approve/eligible per Automated Underwriting System and the Automated Underwriting System yields a referred/eligible per Automated Findings .

  • Referred means that the automated system cannot issue an automated approval with the information and the data entered in the automated approval system.
  • Eligible means that the mortgage loan application is eligible for a mortgage loan approval if it is manually underwritten.
  • Manual Underwriting means that the mortgage file is assigned to a mortgage loan underwriter and has to be manually underwritten.
  • The mortgage underwriter will review the whole mortgage loan application and look for derogatory credit information and analyze the credit risk surround the derogatory credit items and look for compensating factors which are positive factors.
  • Examples of compensating factors are reserves, low payment shock through verification of rent, longevity in job, larger down payment, additional income not used as qualified income, and other positive factors that show strength of the mortgage loan borrower.
  • Mortgage lenders view lower credit score mortgage loan borrower’s as higher risk so under 620 credit 2017 FHA manual underwriting guidelines state that the mortgage loan underwriter has discretion in assessing the risk of the mortgage loan borrower when deriving to decision on whether to issue a mortgage loan approval or not.

Requirements With 2017 FHA Manual Underwriting Guidelines

There are no specific requirements with 2017 FHA Manual Underwriting Guidelines and a lot of deciding factors relies with mortgage underwriter discretion.

  • One of the most important factors most mortgage underwriters require is rental verification and less than 5% payment shock or $100 increase from rental expense to new housing payment, whichever is less.
  • Rental verification is only valid if the renter can provide 12 month’s canceled checks where he or she has paid their rental payments with a bank check.
  • Renter can also provide 12 month’s bank statements if they have paid it online. Cash rental payment does not count as verification of rent.
  • If the renter has leased their apartment or home from a registered property management company, then a verification of rent form provided by the mortgage lender to the property management company can be used in lieu of canceled checks and/or bank statements.
  • All rental payments in the past 12 months needs to have been on time and no 30 day late payments on their monthly rents are allowed.

FHA Manual Underwriting Guidelines On Credit Scores And DTI

The lowest credit scores allowed to qualify for a 3.5% down payment home purchase FHA Loan is 580 FICO credit scores.

  • Mortgage lenders like myself have no FHA mortgage lender overlays and can do manual underwriting mortgage loans with credit scores as low as 580 FICO credit scores.
  • However, most mortgage lenders do have mortgage lender overlays on credit scores with manual underwriting loans where they want a minimum credit score of at least 640 FICO credit scores.

HUD Guidelines On Debt To Income Ratio On Manual Underwriting

  • Most mortgage lenders normally prefer borrower’s debt to income ratios on manual underwrites at 43% DTI.  
  • FHA Manual Underwriting Guidelines on manual underwriting does have a tier on debt to income caps depending on borrower’s credit scores.
  • Compensating Factors will increase debt to income ratio cap requirements.
  • I have done and closed on manual underwriting mortgage loan files with debt to income ratios up to 50% DTI.
  • However, manual underwriters will look for strong compensating factors when underwriting a manual underwrite.

If you are in need of a FHA mortgage lender with no FHA Lender Overlays specializing in manual underwriting, please contact me at 262-716-8151 or email me at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your calls and answer all of your questions.

2017 Update On HUD Manual Underwriting Guidelines: UPDATED On April 24, 2017

Manual Underwrites are becoming very popular. There are instances where an approve/eligible per AUS FINDINGS loan applicant will get downgraded to a manual underwrite such in cases where there are credit disputes. All manual underwriting require verification of rent.

NEW HUD guidelines on manually underwritten loans

The bullet points below applies to all manually underwritten FHA Loans

HUD Mortgagee Letter 2014-02 RESERVES REQUIRED on all manually underwritten loans.

  • 1 months reserves are required on all 1-2 unit properties on manually underwritten FHA Loans.
  • 3 months reserves are required on all 3-4 unit properties with manually underwritten FHA Loans.

Debt Ratio Limits On All FHA Manual Underwriting Loans

Automated Approved FHA Loans debt to income ratios are 46.9% DTI front end and 56.9% DTI back end on borrowers with credit scores 620 FICO and higher. Borrowers with credit scores under 620 FICO, maximum DTI requirements is capped at 43% DTI for an automated underwriting system approval.

Below is the manually underwritten debt to income ratio requirements PER 2017 HUD GUIDELINES ON MANUAL UNDERWRITING:

  • Borrowers with credit scores under 580 FICO or borrowers who need to be underwritten with non-traditional credit, the maximum debt to income ratio required is 31% DTI front end and 43% DTI back end
  • Borrowers with at least a 580+ FICO credit score with NO compensating factors, the maximum front end debt to income ratio is 31% DTI and 43% DTI back end
  • Borrowers with at least a 580 FICO credit score and ONE compensating factor, the maximum front end debt to income ratio is 37% DTI and maximum back end debt to income ratio is 47% DTI
  • Borrowers with at least a 580+ FICO credit score with TWO compensating factors, the maximum front debt to income ratio is 40% DTI and maximum back end DTI is 50% DTI 
  • Borrowers with at least a 580+ FICO credit score with NO discretionary debt, the maximum front end debt to income ratio is capped at 40% DTI and maximum back end is capped at 40% DTI

HUD Guidelines On Compensating Factors

Acceptable Compensating Factors per HUD GUIDELINES are limited to the following:

  • 3 months of reserves for 1-2 unit properties
  • 6 months reserves for 3-4 unit properties
  • New total monthly mortgage payment is not more than $100 and/or 5% higher than previous total monthly housing payment, whichever is less.
  • There is documented 12 monthly housing payment history with no more than one late payment in the past 12 months.
  • Cash-out refinance transactions cannot have any late payments in the past 12 months.
  • Residual income. (See HUD mortgagee letter 2014-02 for details)
  • Verified and documented significant additional income not considered effective income.
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.


  1. barbra caranza says:

    Fantastic suggestions . For my two cents if people want a LCPIA Verification of Rental History Form , We found a blank document here http://www.lendingnetwork.org.

    Greg Kewin
    National Director Of Operations
    Gustan Cho Associates
    The Gustan Cho Team