Mortgage Underwriters Qualify Mortgage Loans And Consider Compensating Factors
Eligible loans with ≥620 credit score:
56.9% back end debt to income ratio and 46.9% front end debt to income ratio.
If manual downgrade required, follow Manual Underwriting requirements below.
Refer/Eligible or Manual Underwritten or Approve/Accept Eligible with scores <620:
37% / 49% unless a lower DTI is required as defined below.
45% maximum total DTI allowed when any of the following apply:
1. Payment shock exceeds 50% of the current housing payment.
2. Credit score is less than 620 and gift funds and/or Down Payment Assistance financing is used for down payment or closing cost.
High Balance Loan Amounts
43% maximum total DTI allowed when any of the following apply:
1. Borrower does not have a minimum of 6 month housing payments or rental history with the last 12 months.
2. 40% maximum housing ratio allowed at the underwriters’ discretion when the borrower’s only debt is the subject properties monthly housing expense.
Compensating Factors Considered By Mortgage Underwriters During Underwriting Process
Second level underwriter review required for loans that exceed 33% / 45% ratios.
Manual underwriting is required when a credit score is <620 and the total DTI is > 43% or when manual a manual downgrade is required per the 4155.1. Loan files must contain documented compensating factors when the DTI is >31% / 43%.
DTI overlays do not apply to Streamline Refinance transactions .
Additional compensating factors considered by mortgage underwriters for borderline mortgage applications
Manually underwritten loans, including those with ratios that exceed the 31%/43% ratio benchmark (to a maximum of 37%/49%), must include documented compensating factors to justify approval. The compensating factors must be documented. The fact that the borrower “has a job” or “has good credit” are NOT acceptable compensating factors, as these characteristics are required for approval. Acceptable compensating factors are as follows:
1. Borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expense for the past 12-24 months.
2. There is only a minimal increase in the borrower’s housing expense.
3. Borrower is making a down payment of 10% or more from own funds.
4. The borrower has demonstrated an ability to accumulate savings.
5. The borrower has demonstrated a conservative attitude toward use of credit.
6. The borrower’s previous credit history shows that he/she has the ability to devote a greater portion of income toward housing expenses.
7. The borrower receives documented compensation or income that has not been included in effective income. This may include food stamps or other public assistance.
8. The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses for the new mortgage over the past 12-24 months.
9. The borrower has substantial documented cash reserves (at least three months worth) after closing. The reserves must be liquid or readily convertible to cash, and can be done so absent retirement or job termination. Funds and/or assets that are not to be considered as cash reserves include equity in other properties, and proceeds from a cash-out refinance.
Partial Borrower’s Retirement Account May Count
1. To account for withdrawal penalties and taxes, only 60% of the vested amount of the account may be used. Requires documentation of the existence of the account with the most recent depository or brokerage account statement. In addition, evidence must be provided that the retirement account allows for withdrawals under conditions other than in connection with the borrower’s employment termination, retirement, or death. If withdrawals can only be made under these circumstances, the retirement account may not be included as cash reserves. If any of these funds are also to be used for loan settlement, that amount must be subtracted from the amount included as cash reserves.
2. Gift funds that remain in the borrower’s account following loan closing, subject to proper documentation, may be considered as cash.
3. Borrower has substantial non-taxable income that has not been grossed-up for qualifying purposes.
4. The borrower has the potential for increased earnings, as indicated by job training or education in the chosen profession.
5. The primary wage-earner is relocating and the secondary wage-earner has an established employment history, is expected to return to work, and has reasonable prospects for securing employment in the new location. The availability of potential employment must be documented.