This BLOG On DTI Manual Underwriting Guidelines On FHA And VA Mortgages Was PUBLISHED August 13th, 2019
Manual Underwriting and DTI
- If you have been following our blogs, you are aware of the Gustan Cho Associates specialize in manual underwriting
- While the majority of banks do not allow manual underwriting, we do not have any LENDER OVERLAYS
- This is why we are able to help more borrowers than most banks
In this blog, we will detail the debt to income requirements for manual underwriting on FHA and VA mortgages.
How Are Debt To Income Ratios Calculated By Mortgage Underwriters
First, we must understand the definition of debt to income ratios.
- There are two separate ratios involved with debt to income
- There is a “front-end” debt to income ratio and a “back-end” debt to income ratio
- The front-end debt to income ratio is simply your housing payment divided by your total gross income
The back-end debt to income ratio is your housing payment plus all consumer debts divided by total gross income.
Case Scenario On How Underwriters Calculate DTI
- A borrower makes $60,000 a year or $5,000 a month
- Car payment $350
- Student loans $200
- Credit cards $150
- Total Debts = $700
New housing payment will be $1,750
- Front end DTI: $1,750 / $5,000 = 35%
- Back end DTI: ($1,750 + $700) / $5,000 = 49%
In this example, the borrower’s debt to income ratios is 35% / 49%.
Benefits With Automated Underwriting System Approval Versus DTI Manual Underwriting Guidelines
When you receive an automated AUS approval, your debt to income ratio may be higher versus when you manually underwrite.
- On a VA loan, there’s no true debt to income ratio requirements
- Since we do not have any lender overlays, we have closed VA loans with back end debt to income ratios over 62%
- With an FHA loan, the max back in debt to income ratio allowed is 56.9% per AUS findings
In order to go up to 56.9%, typically you need a strong credit score and at least one month of reserves.
What Is Manual Underwriting Versus Automated Underwriting System Approval
What about manual underwriting?
Manual underwriting is slightly different. The HUD 4001.1 HANDBOOK clearly states debt to income ratio requirements for FHA manual underwriting mortgages. The requirements are different based on COMPENSATING FACTORS. Please click the link for more details.
Below is the debt to income requirements for FHA manual underwriting:
- NO CREDIT SCORE – DTI is capped at 31% / 43%
- 500 – 579 credit score – DTI is capped at 31% / 43%
- 580 and above – max DTI is 31% / 43% WITHOUT compensating factors
- 580 and above – max DTI is 37% / 47% with ONE compensating factor
- 580 and above – max DTI is 40% / 50% with at least TWO compensating factors
How Compensating Factors Affect DTI Manual Underwriting Guidelines On FHA And VA Mortgages
A few examples of Compensating factors:
- 3 months of reserves (for 1 – 2 unit properties)
- 6 months reserves (for 3 – 4 unit properties)
- Low payment shock (housing payment does not increase by more than 5%)
- Longevity on job
- Residual income
DTI Manual Underwriting Guidelines On VA Loans
VA mortgages are once again in a little different when it comes to manual underwriting and debt to income ratios.
- While there is no true max that to income ratio guideline, we have yet to have a mortgage approved with a higher than 54% back end ratio
- The underwriter must be able to comfortably sign off that you have the ability to repay the mortgage
- The ability to repay act is an outcome of the real estate crash of 2008
- When the government stepped in overtook regulations for mortgages, they introduce the ability to repay act
- Please see the CFPB Website for more information on the Ability To Repay Act
- This is a step in the right direction for mortgage regulation
Now each borrower must document they can repay their mortgage before qualifying for the loan.
Qualifying For VA And FHA Loans With Direct Lender With No Overlays On DTI Manual Underwriting Guidelines
Since the majority of our clients have been turned down by another lender, many times they are skeptical to start the process with Gustan Cho Associates. This is why we encourage our clients to check out our amazing reviews. We are available to answer your questions seven days a week, mornings or evenings. We pride ourselves on training our loan officers to be up to date on mortgage guidelines. The majority of loan officers in this business want clients with a 700+ credit score with a significant down payment. Most of our clients do not fit into that category. Whether you received a last-second denial or simply want another opinion about your mortgage, please contact Mike Gracz on 630-659-7644 or text us for faster response. Or e-mail us at firstname.lastname@example.org . Either Mike or one of his highly trained loan officers will assist you with your mortgage needs. The path to homeownership can be difficult, that is why it is important to come to the experts. Lender overlays get in many Americans way up achieving the dream of homeownership. We do not have that prob