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Compensating Factors Manual Underwriting Guidelines

Gustan Cho Associates
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This BLOG On Compensating Factors Manual Underwriting Guidelines Was PUBLISHED On May 29th, 2019

VA and FHA Home Loans allow for manual underwriting.

  • Fannie Mae and Freddie Mac does not allow manual underwriting on conventional loans
  • There are instances where borrowers cannot get an approve/eligible per automated underwriting system on VA and FHA Loans
  • They often get a refer/eligible per AUS
  • On cases where borrowers get a refer on VA and FHA Loans, lenders can downgrade the file to manual underwriting
  • Compensating Factors Manual Underwriting Guidelines applies for all manual underwrites
  • Not all lenders can do manual underwriting

Gustan Cho Associates at Loan Cabin Inc. are experts in manual underwriting on VA and FHA Mortgages.

Qualifying For VA And FHA Loans During And After Chapter 13 Bankruptcy

Home buyers can qualify for VA and FHA Loans during Chapter 13 Bankruptcy Repayment Plan after one year into the plan.

  • Need Bankruptcy Trustee Approval
  • Chapter 13 Bankruptcy does not need to be discharged
  • However, all VA and/or FHA Loans during Chapter 13 Bankruptcy Repayment Plan needs to be manual underwriting
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for VA and FHA Loans
  • However, if the Chapter 13 Bankruptcy discharge has not been discharged for at least two years, it needs to be manually underwritten
  • Compensating Factors Manual Underwriting Guidelines applies on all VA and FHA Manual Underwriting Loans
Compensating Factors Manual Underwriting
Gustan Cho Associates

Mortgage Lender Overlays On Government And Conforming Loans

Most lenders have overlays on government and conventional loans.

  • All lenders need to meet agency lending guidelines by FHA, VA, USDA, Fannie Mae, and/or Freddie Mac
  • However, lenders can have higher credit requirements called overlays
  • It is not against the law for lenders not to accept borrowers who meet agency guidelines and require higher mortgage requirements
  • Not all lenders have the same FHA, VA, USDA, Conventional Lending Requirements
  • HUD, the parent of FHA may say borrowers can qualify for VA and/or FHA Loans during Chapter 13 Bankruptcy repayment
  • This holds true as long as they meet compensating factors manual underwriting guidelines
  • However, most lenders will have overlays and not accept borrowers until after their Chapter 13 discharge has been seasoned two years. This is called overlays by lenders

Why Does Automated Underwriting System Trigger Refer/Eligible Per Findings

There are times when loan officers fully believe borrowers will get an approve/eligible per AUS FINDINGS but the system triggers a refer/eligible.

  • Every mortgage applicant’s credit/income profile is unique
  • Every borrowers findings is based on their own unique case by case scenario basis
  • Sometimes the automated system cannot render a decision and needs to render an automated decision
  • The AUS wants a human underwriter to manually underwrite the loan file
  • This is when the system renders a refer/eligible per AUS FINDINGS
  • Compensating Factors Manual Underwriting Guidelines applies when the file is downgraded to a manual underwrite
  • Compensating Factors is very important
  • This is because this is how underwriters analyze risk on a file
  • Compensating Factors Manual Underwriting Guidelines justifies mortgage underwriters in approving home loans for riskier borrowers
  • Compensating Factors determines the borrowers ability to repay their mortgage after it funds
Gustan Cho Associates
Gustan Cho Associates

Compensating Factors Manual Underwriting VA Guidelines

VA does not have minimum credit score requirements.

  • VA also does not have any debt to income ratio requirements
  • Both credit scores and debt to income ratios are determined by automated findings
  • However, it is different with manual underwriting
  • Most lenders do not want VA borrowers to exceed 41% debt to income ratios on manual underwriting
  • Debt to income ratios can be higher on VA manual underwriting loans with compensating factors

Here are VA Compensating Factors Manual Underwriting Guidelines:

  • Rental Verification with payment shock of no more than 5% and/or $100 whichever is less
  • Down payment on VA Loans: VA does not require down payment
  • Reserves and the ability of having history of saving money in the past is considered a strong compensating factor
  • Low credit utilization ratio and established credit tradelines
  • Job longevity and history of increased wage earnings through training, education, promotion
  • Other income such as part time income earned for at least past 12 months but not used to qualify
  • Non taxable income
  • Low Debt and debt to income ratio
  • Residual income

If borrowers do not have traditional credit, manual underwriting allows for non-traditional credit to be used.

Compensating Factors Manual Underwriting FHA Guidelines

Gustan Cho Associates

Gustan Cho Associates

FHA Compensating Factors Manual Underwriting Guidelines is similar to VA Guidelines.

  • Minimum down payment to qualify for FHA Loans is 580 for borrowers with 580 scores
  • Borrowers can qualify for FHA Loans with credit scores between 500 to 579 with 10% down payment
  • HUD allows debt to income ratios to be as high as 46.9% front end and 56.9% back end on approve/eligible per AUS
  • However, debt to income ratios greatly gets reduced to 31% front end and 43% back end on manually underwritten FHA Loans
  • However, debt to income ratios can greatly be increased to 40% front end and 50% back end with 2 compensating factors on FHA manual underwritten loans
  • Reserves are required on all manual underwrites
  • For one and two unit homes, one months reserves is required
  • For three and four unit homes, three months reserves is required
  • One months reserves is one months of principal, interest, taxes, and insurance payments (PITI)

Here is a list of FHA Compensating Factors Manual Underwriting Guidelines: 

  • Borrowers with credit scores under 580 cannot exceed 31% front end and 43% back end debt to income ratios unless the home is a certified energy sufficient home: Then DTI can go as high as 33% front end and 45% back end
  • Maximum debt to income ratios on FHA Manual Underwrites is 40% front end and 50% back end with 2 compensating factors
  • One months reserves on single family home and two units
  • Three months reserves with three to four unit homes
  • Payment shock of less than 5% and/or $100 whichever is less is considered strong compensating factors
  • Residual income is considered compensating factors
  • Additional income and/or other income that is not used as qualified income
  • Larger down payment

Maximum Debt To Income Ratio On Manual Underwriting

  • Maximum 41% front end and 43% back end DTI with 580 credit scores and no compensating factors
  • Borrowers can go up to 37% front end and 47% back end DTI with one compensating factor
  • With two compensating factors and 580 FICO credit scores, maximum debt to income ratio allowed is 40% front end and 50% back end
  • Borrowers with no discretionary debt and 580 FICO they can go to 40% front end and 40% back end debt to income ratio

Borrowers who need a direct lender with no overlays on government and conventional loans please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. The Gustan Cho Team at Loan Cabin Inc. are experts in Compensating Factors Manual Underwriting Guidelines on VA and FHA Loans.

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