Debt To Income Ratio Requirements With Manual Underwriting
This ARTICLE Is About Debt To Income Ratio Requirements With Manual Underwriting
Debt to income ratios is one of the most important factors when it comes to qualifying for a mortgage loan.
Every mortgage loan program has its own set of guidelines when it comes to debt to income ratio requirements.
- For example, conventional loans have a debt to income ratio caps at 50% DTI
- With FHA Loans, to get an approve/eligible per Automated Underwriting System, the maximum front end debt to income ratio is capped at 46.9% DTI and the maximum back end debt to income ratios are capped at 56.9% with at least 620
- If borrowers applying for FHA Loans has credit scores under 620, the maximum debt to income ratio requirements is capped at 43% DTI to get an approve/eligible per Automated Underwriting System
- There are loan applicants who cannot get an approve/eligible per Automated Underwriting System because the automated system cannot render a decision and will render a refer/eligible
- What a refer/eligible means is that the mortgage loan applicant is eligible for an FHA Loan
- However, the automated system cannot approve the mortgage loan
We will discuss and cover more on manual underwriting and compensating factors in the following paragraphs.
What Does Refer/Eligible Per Automated Underwriting System Mean?
- In cases where the automated system yields a refer/eligible, the applicant may be eligible for manual underwriting
- Manual underwriting is where a mortgage underwriter needs to manually underwrite the loan application and review the whole file and render its decision
- There is no debt to income ratio requirements with manual underwriting
- However, the mortgage underwriter will thoroughly review the layers of risk the mortgage file has and will especially look for compensating factors
Compensating factors are extremely important in manual underwriting applications.
What Are Compensating Factors
Compensating factors are positive factors that show strength on the mortgage borrowers such as low payment shock through the following positive factors:
- verification of rent
- longevity on the job
- part-time or other income that the borrower has but is not used to qualify for the mortgage loan
- the working spouse who is not added to the loan
- other positive factors
How Do Underwriters Evaluate Debt To Income Ratio Requirements On Manual Underwriting
How Do Underwriters evaluate debt to income ratio requirements on manual underwriting is a question I get asked often.
- Not all lenders will do manual underwriting
- Manual underwriting is needed on files that cannot get an approve/eligible per the Automated Underwriting System
- For example, all applicants who had a Chapter 13 Bankruptcy discharged
- If the discharged date has not been seasoned for at least two years, borrowers can qualify for an FHA Loan
But will not get an approve/eligible per Automated Underwriting System if the discharge has not been seasoned two years from the discharged date.
Manual Underwriting On Chapter 13 Bankruptcy
I recently got a borrower who just had a Chapter 13 Bankruptcy discharged less than a year ago that got a refer/eligible per Automated Underwriting System:
- Got them approved via manual underwriting
- However, the back end debt to income ratios were 52% which is considered extremely high for manual underwriting
- The manual underwriting underwriter approved this file because this client had a lot of compensating factors
- The borrower had two full-time jobs
- But could only use one of the full-time jobs as income
- This because she did not have two-year seasoning with her second full-time job as a nurse
- The borrower had plenty of reserves
- Not just in her bank accounts, but also had a hefty 401k
- The borrower has been in the nursing field for over 10 years
- Has been with the same employer without any gaps in employment in the past 2 years
- The borrower has verification of rent, which is mandatory on all manual underwriting
- The borrower has paid all of her bills on time during the Chapter 13 Bankruptcy re-payment plan
- Has not had a late payment since her Chapter 13 Bankruptcy discharged date
- In this particular case scenario, there was no debt to income ratio requirements with manual underwriting due to the many compensating factors
The mortgage underwriter saw on this file and approved her with a 52% back end debt to income ratio.
Rental Verification Is Required On Manual Underwriting
Many folks who rent do not realize the importance of paying their rental payments with a check.
- Many renters pay their monthly rental payments on time, month after month, year after year, but do not pay it with a check or online and pay it with cash
- Any cash rental payment will not count for verification of rent
- Verification Of Rent is one of the most important compensating factors a borrower can have and verification of rent is a requirement on all manual underwriting
- The only way verification of rent can be proven is by providing 12 months canceled checks and/or 12 months bank statements if the rental payments were wired to the landlord and paid online
- If the renter has been renting from a registered property management company, then verification of rent form signed by the property management manager can be used in lieu of canceled checks and/or online bank statements
- Verification of Rent is also required for mortgage loan applicants with credit scores of under 600
- Reason verification of rent is so important is lenders want to determine payment shock
- For example, if you are living rent-free with family and are used to paying no rent and new housing payment will be $1,200, that is a huge payment shock
- However, if renters are currently paying $1,000 per month in rent and new housing payment will be $1,100, then your payment shock of $100 per month or 10% should be no issue
Gustan Cho Associates will waive verification of rent for borrowers who have been living rent-free with family members to save money for the down payment and closing costs on a home purchase.
Debt To Income Ratio Requirements With Manual Underwriting: Qualifying For Mortgage With Lender With No Overlays
Homebuyers who told they do not qualify for a home loan by another lender because they do not meet debt to income ratio requirements with manual underwriting or lender do not do manual underwriting or have many mortgage lender overlays please contact us at Gustan Cho Associates at 1-262-716-8151 or text us for faster response. Borrowers can also email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays to answer all of your questions and issue pre-approval letters. We are a full-service mortgage company licensed in multiple states with no lender overlays. We have zero overlays on FHA Loans and just follow HUD 4000.1 FHA Handbook Guidelines.