DTI Manual Underwriting Guidelines

DTI Manual Underwriting Guidelines on FHA and VA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

The DTI Manual Underwriting Guidelines for FHA and VA loans are quite alike. Among home mortgage programs, only FHA and VA loans permit manual underwriting. There is common confusion regarding the distinctions between manual underwriting and files approved by an automated underwriting system (AUS).

While manual and AUS-approved underwriting fundamentally serve the same purpose, manual underwriting involves a meticulous review by a human mortgage underwriter. Additionally, the debt-to-income ratios allowed are generally more restrictive for manual underwriting compared to those approved by automated underwriting systems.

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What Are The Major Differences Between Manual and Automated Underwriting?

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The primary distinction between manual and automated underwriting systems, as outlined in the DTI Manual Underwriting Guidelines, lies in the permissible debt-to-income ratios. Borrowers undergoing manual underwriting are typically subject to stricter debt-to-income ratio limits than those whose applications are processed through automated systems.

The maximum allowable debt-to-income ratio for borrowers is influenced by various compensating factors as well as the discretion of the underwriter.

The mortgage underwriter holds significant authority in manual underwriting, particularly in making discretionary decisions. It is the underwriter’s responsibility to assess whether a borrower meets the mortgage criteria, with the debt-to-income ratio being a crucial consideration in the approval process for manual underwriting.

What Is Manual Underwriting and How Does It Work?

Manual Underwriting” refers to the process where a mortgage underwriter individually assesses an FHA mortgage loan application. The FHA and VA loan programs are unique in that they permit this type of manual review. Both programs have specific guidelines outlined in the DTI Manual Underwriting Guidelines that govern manual underwriting:

Every home loan that undergoes manual underwriting is subject to rigorous examination. The mortgage underwriter holds considerable authority and discretion in these cases. Compared to approved loans by the Automated Underwriting System (AUS), manual underwrites present a higher risk to lenders.

In the manual underwriting process, the underwriter meticulously evaluates:

  • Borrower’s income
  • Assets
  • Liabilities
  • Overall credit
  • Credit scores
  • Credit history

Underwriters constantly consider the borrower’s ability to manage the new housing payment. They also seek compensating factors that mitigate the risks associated with manual underwriting.

As highlighted in our blog posts, Gustan Cho Associates specializes in manual underwriting for FHA and VA loans. Unlike many banks and mortgage companies that typically avoid manual underwriting, we do not impose any lender overlays on government and conventional loans, enabling many of our clients to pursue home ownership through manual underwriting.

Is Getting a Loan Approval With Manual or Automated Underwriting System is more difficult?

The mortgage underwriters at our institution are committed to facilitating successful deals. They proactively seek ways to support applications rather than finding reasons to reject them. For borrowers subject to manual underwriting, the DTI Manual Underwriting Guidelines suggest a maximum front-end debt-to-income ratio of 40% and a back-end ratio of 50%, as HUD and the Veterans Administration (VA) advised. Approval under these conditions typically requires the presence of at least two compensating factors.

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Mortgage Underwriter Discretion on Manual Underwrites

Under the DTI Manual Underwriting Guidelines, mortgage underwriters can approve loans surpassing the standard DTI ratio if they determine that strong compensating factors make the borrower a reliable risk. Our no-lender overlay business model allows us to assist a wider range of borrowers than many traditional banks.

How do Mortgage Underwriters Calculate Debt-To-Income Ratios?

To start, it’s important to understand debt-to-income (DTI) ratios as outlined in the DTI Manual Underwriting Guidelines. DTI ratios consist of two distinct calculations: the front-end DTI ratio and the back-end DTI ratio. To calculate your front-end DTI ratio, divide your housing expenses by your total gross income. Meanwhile, the back-end DTI ratio includes your housing expenses and all other consumer debts divided by your total gross income.

Case Scenario on How Underwriters Calculate DTI

An individual earns an annual salary of $60,000, which equates to a monthly income of $5,000.

Breakdown of the borrower’s debts:

  • Monthly car loan payment: $350
  • Monthly student loan payment: $200
  • Monthly credit card payments: $150
  • Total monthly debts: $700

The borrower’s new monthly housing expense will amount to $1,750.

Calculating the DTI ratios according to the DTI Manual Underwriting Guidelines:

  • Front-end DTI ratio: The housing expense of $1,750 divided by the monthly income of $5,000 results in a front-end DTI of 35%.
  • Back-end DTI ratio: The total of the housing expense and other debts ($1,750 + $700) divided by the monthly income of $5,000 gives a back-end DTI of 49%.

In this scenario, the borrower’s debt-to-income ratios are calculated to be 35% for the front end and 49% for the back end.

Automated Underwriting System Approval Versus DTI Manual Underwriting Guidelines

When you secure an automated AUS approval, your debt-to-income (DTI) ratio can be higher than if you opt for manual underwriting. Particularly with VA loans, there are no strict DTI requirements. We’ve successfully processed VA loans with back-end DTI ratios exceeding 62% without lender overlays in our processes.

Achieving an AUS approval on VA loans with elevated DTI ratios often hinges on the borrower’s substantial residual income. In contrast, the AUS can approve a maximum back-end DTI ratio of 56.9% for FHA loans. To qualify for this upper limit, borrowers generally need a robust credit rating and a minimum of one month’s reserves. This information aligns with the DTI Manual Underwriting Guidelines.

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What Is Manual Underwriting VS Automated Underwriting System Approval

Manual underwriting is distinct from other methods. According to the HUD 4001.1 Handbook, specific debt-to-income (DTI) ratio requirements for FHA manual underwriting mortgages vary depending on compensating factors. For more information, please refer to the detailed guidelines. Here are the DTI Manual Underwriting Guidelines for FHA manual underwriting:

  • The DTI is limited to 31%/43% for applicants with no credit score.
  • For those with a credit score between 500 and 579, the DTI is also capped at 31%/43%.
  • Suppose a credit score is 580 or higher. In that case, the borrower can have a maximum allowable DTI of 31%/43% without compensating factors.
  • With one compensating factor, individuals with a credit score of 580 or above can have a DTI of up to 37%/47%.
  • With two or more compensating factors, the DTI can increase to 40%/50% for those with a credit score of 580 and above.

How Compensating Factors Impact DTI Manual Underwriting Guidelines on FHA and VA Loans

A few examples of compensating factors are:

  • Three months of reserves (for 1–2 unit properties):
  • Six-month reserves (for 3–4 unit properties)
  • Low payment shock (housing payment does not increase by more than 5%)
  • Longevity on job
  • Residual income

What is the DTI for a VA Manual Underwrite?

DTI Manual Underwriting GuidelinesAccording to the DTI Manual Underwriting Guidelines, the recommended Debt-to-Income (DTI) ratio for VA loans under manual assessment is typically 41% or lower. This suggests that monthly debt repayments should be at most 41% of an individual’s monthly earnings. However, this threshold serves more as a flexible guideline than a rigid cap, as there is leeway to accommodate certain compensating factors. These may include a reliable history of regular housing payments, significant cash reserves, or a slight rise in housing expenses.

According to the DTI Manual Underwriting Guidelines, residual income plays a crucial role in the context of VA Loans. It is the money left over after all necessary bills, such as debt payments, have been paid each month. This measurement is important because it ensures borrowers have enough monthly funds to cover their living expenses. This is especially important for borrowers with a high DTI, as it provides additional financial security beyond the basic DTI metric.

How Underwriters Determine Borrower’s Ability To Repay New Housing Payment

The DTI Manual Underwriting Guidelines were established following the real estate downturn 2008. As a result of this crisis, the government intervened in mortgage regulation by implementing the Ability to Repay Act. For further details on the Ability to Repay Act, please refer to the CFPB website. This regulatory measure marks a positive advancement in mortgage oversight, requiring all borrowers to provide proof of their capacity to repay the mortgage before loan approval.

Lender With No Overlays on FHA and VA Loans

Many of our clients come to us after being rejected by other lenders, making them apprehensive about initiating the process with Gustan Cho Associates. This is why we recommend that they read our excellent reviews. We are available to answer any questions seven days a week, during morning or evening hours.

At Gustan Cho Associates, we ensure our loan officers are well-versed in the latest mortgage guidelines, including the DTI Manual Underwriting Guidelines. While the industry typically favors clients with credit scores above 700 and substantial down payments, our clientele often needs to meet these criteria. Our commitment to effectively serving diverse clients is a source of pride for us.

Who Chooses Whether A Homebuyer Needs Manual or Automated Underwriting?

DTI Manual Underwriting Guidelines apply to borrowers who are unable to secure an approve/eligible status via Automated Underwriting Systems (AUS). Those who receive a refer/eligible designation from the AUS may still be eligible for manual underwriting. This status indicates that the automated system could not grant automated approval, and additional review by a human mortgage underwriter is necessary.

Borrowers with refer/eligible findings might still qualify for an FHA loan through manual underwriting, permitted under FHA and VA loan programs.

Conversely, conventional loans do not allow for manual underwriting. In manual underwriting processes, mortgage underwriters have considerable discretion. Successful approval often hinges on the borrower’s history of making timely payments over the previous 24 months.

How Mortgage Underwriters Analyze Derogatory Credit Tradelines

Following the DTI Manual Underwriting Guidelines, mortgage underwriters will scrutinize derogatory credit information, public records, and debt-to-income ratios while searching for compensating factors. Compensating factors represent borrowers’ positive attributes to counterbalance adverse credit or imperfect financial histories.

What Are Compensating Factors on Manual Underwrites

DTI Manual Underwriting Guidelines include several compensating factors that can strengthen a borrower’s loan application. These compensating factors include:

  • The presence of financial reserves
  • A long tenure at the current job
  • A history of rent payments being verified
  • Additional income sources like part-time earnings are not considered in the qualifying income
  • Income from a spouse who is not listed on the mortgage loan
  • Making a larger initial down payment
  • Other favorable conditions presented by the borrower

Manual underwriting is required for all FHA Loans processed during or after a Chapter 13 Bankruptcy discharge. Automated underwriting systems can only approve loans automatically after two years since the discharge. However, home buyers may be eligible for an FHA Loan immediately following the discharge of a Chapter 13 Bankruptcy through manual underwriting without any mandatory waiting period.

DTI Manual Underwriting Guidelines on Reserves

On manual underwriting, the mortgage underwriter will likely want to see three months of reserves by the mortgage loan borrower. One month’s reserves are equivalent to one month’s P.I.T.I., which is principal, interest, taxes, insurance, and HOA fees, if applicable.

HUD allows 100% gifted funds for the down payment and closing costs on a home purchase.

Reserves cannot be gifted and need to be the borrower’s funds. Reserves do not have to be liquid cash in bank accounts. Retirement and investment accounts can be used for reserves. Asset accounts such as IRAs, 401k, and securities investment accounts can be used for reserves.

What Are FHA TBD Manual Underwriting Pre-Approvals

There Are Many Benefits of FHA TBD Manual Underwriting Guidelines as Pre-Approvals for Borrowers with bad credit or those considered marginal borrowers. At Gustan Cho Associates, we constantly expand the programs we offer our clients. We are excited to announce updates to our “To Be Determined” underwriting process. We can “TBD” underwrite manually underwritten mortgage loans. Click here to get Pre-Approvals

FHA and VA Manual Underwriting Lending Experts And Mortgage Lenders

Gustan Cho Associates specializes in FHA and VA manual underwriting. We now have the ability to underwrite your file before you put an offer on a property.  We will detail and explain how manual underwriting works and the mortgage process on our TBD process for manually underwritten loans.

What Does FHA TBD Manual Underwriting Mean?

First, it is important to understand what a manual underwrite means. All lenders follow the same guidelines. Although some lenders add additional LENDER OVERLAYS, Gustan Cho Associates does not. We go off the agency guidelines and nothing further. When completing your automated underwriting system, the algorithm will determine your risk and qualifications based on the items you provide and your credit report.

Automated Underwriting System Findings (AUS Approval)

The automated underwriting system will factor in payment history, credit score, income, and assets/ reserves to calculate your qualifications. The automated underwriting system will produce a few different responses. The best possible outcome is called approve/eligible. Based on the information provided, your file has automated approval and is eligible for sale on the secondary market. Hence the terms, “approve” and “eligible”. For more on AUS, see our AUS BLOG.

DTI Manual Underwriting Guidelines Versus Automated Underwriting System

The second-best outcome is referred/eligible. The first word refer to means you need to downgrade this file to a manually underwritten loan. Eligible still stands for being eligible for sale on the secondary market. Manual underwriting is when an underwriter needs to go through your file with a fine-tooth comb.

The underwriter makes sure you qualify based on manual underwriting guidelines, which are more strict with income ratios and reserve requirements.

Refer/Eligible Versus Automated Approval Findings

Your AUS may receive refer/ineligible report. Once again, the first word, “refer,” means you may manually underwrite this loan. It did not get an automated approval. However, the second word, “ineligible,” means this loan is ineligible for sale on the secondary market, and the lender cannot close this file.

The second word must say “eligible” to qualify. The file does not meet agency guidelines if the loan is not eligible for sale on the secondary market.

Case Scenario on DTI Manual Underwriting Guidelines

This blog will focus on refer/eligible manually underwritten files. We do not expect you to know the automated underwriting system terminology. However, if your current lender has turned you down, having them send you your AUS report is a good idea. This will give us insight into what is holding back your qualifications. Below are a few tips for passing manual underwriting guidelines.

FHA Manual Underwriting Underwriting Analysis

This section will cover the important factors for FHA manual underwriting. Down Payment: Credit scores 500 – 579 need at least a 10% down payment. Credit scores 580 and higher need at least a 3.5% down payment. Gift funds are allowed for the down payment and gift funds. However, mortgage underwriters do not view gift funds favorably.

Importance of Timely Payments in the Past 12 Months

Importance of on-time payments. Installment debts and housing payments must be current. You cannot have any 30-day late payments in the previous 12 months and no more than 2×30-day late payments in the previous 24 months.

If you were more than 30 days late in the past 24 months, you must wait until that late payment is processed. Installment debt includes auto payments, personal loans, and student debt.

The installment account has the same payment every month. So, you know what to pay. This is why guidelines are not lenient for installment payments. When you take out an installment loan, you know what your payment will be every month. This should allow you to budget accordingly.

Revolving Accounts Mortgage Guidelines

No major derogatory payments on revolving credit cards in the past 12 months. A major derogatory payment is a 1×90 daily payment or a 3×60 day late payment.

Collections Accounts Mortgage Guidelines

You may not have any non-medical collections in the past 12 months. Any recent collections will disqualify you from passing a manual underwrite. Outstanding collections and charged-off accounts do not have to be paid to qualify for an FHA loan.

Documents Required To Start The Mortgage Process

Documentation is key for manually underwritten loans. A verification of rent will be completed to make sure your housing payments are on time. If you rent from a large management company, we can verify your payment history through them. If you rent from a small landlord or a family member, we will need to see 12 canceled checks showing an on-time payment history for your rental.

An underwriter is responsible to covering all bases. For example, if you are in mortgage modification, the underwriter must verify at least 12 on-time payments to be modified.

Credit Disputes During The Mortgage Process

Disputed accounts on your credit report will stall the process: If you are disputing accounts totaling $1000 or more, you must call the credit bureaus and remove the verbiage dispute. All non-medical collections will use a 5% monthly payment. That is 5% of the total monthly balance.

With the manually underwritten long, charge-offs do not count against your debt-to-income ratio. Like any FHA loan, the same waiting period stands for derogatory credit. Your case number must be assigned after waiting for all events such as a foreclosure, short sale, deed-in-lieu, Chapter 7, or Chapter 13 bankruptcy.

Waiting Period After Bankruptcy, Foreclosure, and Late Payments

Waiting Periods:

  • Foreclosure, short sale, deed-in-lieu: 3 years from the date the property is transferred out of your name (see county records for exact date)
  • Chapter 13 bankruptcy: eligible after you have made at least 12 on-time payments to the trustee, NO WAITING PERIOD AFTER DISCHARGE
  • Chapter 7 bankruptcy: 2 years after discharge

What is the DTI for Manual Underwrite on FHA loans?

Nontraditional credit tradelines can be applied for manually underwritten files. For more information, please see our blog on NON-TRADITIONAL CREDIT.
As mentioned above, when manually underwriting an FHA loan, there are more strict debt-to-income and reserve requirements. Under FHA manual underwriting, the maximum DTI ratio is typically capped at 43%. This is stricter than the automated underwriting systems allow, where DTIs can sometimes go up to 50% with compensating factors.

However, for manual underwriting, the FHA also allows DTI ratios to exceed 43% if compensating factors are present, such as significant residual income, large cash reserves, or evidence of consistent payment of housing costs equal to or higher than the proposed monthly mortgage payment.

Importantly, FHA manual underwriting strongly emphasizes the borrower’s payment history and reserves, and each case is considered on its individual merits.

What is the DTI Limit for FHA loans?

DTI limits for manual underwriting based on credit scores:
  • No credit score: 31/43
  • 500, 579 – 31/41
  • 580 and above: 31/43 (with no compensating factors)
  • 580 and above 37/47 (with one compensating factor)
  • 580 and above -40/40 (with no discretionary debt)
  • 580 and above 40/50 (with two compensating factors)

FHA TBD Manual Underwriting Reserve Guidelines

Reserve requirements for manual underwriting:

  • 1–2 unit properties; -1 month of PITIA (Principal, interest, taxes, insurance, and any association dues)
  • 3–4 unit properties -3 months of PITIA (Principal, interest, taxes, insurance, and any association dues)

When using reserves for a compensating factor, you need to verify more funds

  • 1 – 2 unit properties -3 months of PITIA (Principal, interest, taxes, insurance, and any association dues)
  • 3 – 4 unit properties -6 months of PITIA (Principal, interest, taxes, insurance, and any association dues)

It is important to understand that reserve funds stay in your bank account. However, they are underwriting requirements in case something catastrophic happens, like losing your job. This will give you time to get back on your feet and not fall behind on mortgage payments.

Selecting an Expert Lender on FHA TBD Manual Underwriting

If you are not in the mortgage industry, you are probably confused by this overload of information. That is why we are here. We are the experts in manual underwriting. Once we have your completed application and documentation, we will send your file directly to an FHA underwriter. They will underwrite your credit report and assets and issue a true pre-approval. This will allow you to shop for a home with confidence.

Once you find your dream home, we will order the appraisal and title report and ask for a few updated documents. The process will be quick and easy, and we can close in as little as three weeks.

To discuss your TBD underwriting qualifications, please contact us at Gustan Cho Associates at 800-900-8569 or email us at alex@gustancho.com. Text us for a faster response.

FAQ on DTI Manual Underwriting Guidelines on FHA and VA Loans

1. What is the major difference between manual and automated underwriting? The primary difference between manual and automated underwriting is the debt-to-income (DTI) ratio guidelines. Manual underwriting typically requires lower DTI ratios compared to automated underwriting.

While automated systems use algorithms to evaluate borrower eligibility, manual underwriting involves a detailed review by a human underwriter who has significant discretion to interpret and weigh the borrower’s financial information, including the presence of compensating factors.

2. What is manual underwriting, and how does it work? Manual underwriting is a process where a mortgage underwriter thoroughly reviews a borrower’s financial details by hand rather than relying on an automated system. This method is essential for cases where automated systems can’t adequately capture the complexity of a borrower’s financial situation.

It’s especially common in FHA and VA loans, where specific guidelines, such as compensating factors and the underwriter’s discretion, play a crucial role in the approval process.

3. Is getting a loan approval easier with manual or automated underwriting systems? Obtaining loan approval through manual underwriting can be more challenging due to the stricter DTI limits and the need for compensating factors. However, it can benefit borrowers who do not meet the criteria of automated systems but still demonstrate financial stability through other means.

Manual underwriters ensure that all possible avenues are explored to make a loan work, often considering unique aspects of a borrower’s financial picture.

4. How do mortgage underwriters calculate debt-to-income ratios? Underwriters calculate two types of DTI ratios: front-end and back-end. The front-end ratio includes only the housing-related expenses divided by the borrower’s gross income. In contrast, the back-end ratio includes all debt obligations plus housing expenses divided by the gross income. These ratios help lenders assess the borrower’s ability to manage monthly payments relative to their income.

5. What powers do mortgage underwriters have in manual underwriting? In manual underwriting, mortgage underwriters have significant discretion. This power allows them to approve loans that exceed standard DTI ratios if they believe the borrower presents a good risk, supported by strong compensating factors such as substantial reserves or consistent payment history. This discretion is crucial in helping more borrowers qualify for loans under manual underwriting conditions.

6. What are compensating factors in manual underwriting? Compensating factors are positive aspects of a borrower’s financial situation that offset potential risks in their profile. Examples include having reserves amounting to several months of mortgage payments, long tenure at a current job, residual income, low payment shock, or additional income not used for qualifying. These factors can influence underwriters to approve higher DTI ratios under manual underwriting.

7. What should borrowers expect in terms of documentation for manual underwriting? To obtain a loan, borrowers must provide extensive documentation, such as proof of income, assets, liabilities, credit history, and other pertinent financial information. Verification of rent or mortgage payments, particularly through bank statements or checks, is often critical to demonstrate the reliability in managing housing-related expenses.

8. How do FHA and VA manual underwriting guidelines differ? While FHA and VA loans allow manual underwriting, the specific guidelines and flexibilities can differ. For instance, VA loans do not have a prescribed maximum DTI ratio but focus more on the residual income standard. On the other hand, FHA loans have specified maximum DTI ratios that can be adjusted based on compensating factors presented by the borrower.

This blog on DTI Manual Underwriting Guidelines was updated on April 16th, 2024.

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