This Article Is About FHA AUS Approval Versus Manual Underwriting On FHA Loans 

HUD, the parent of the Federal Housing Administration (FHA) has recently changed its algorithms on the Automated Underwriting System (AUS) to make harder to get an approve/eligible per AUS on FHA Loans.

This only applies for borrowers with credit scores of under 640 FICO. What this means is it will be more difficult for borrowers with under 640 FICO to get an approve/eligible per automated underwriting system (AUS). Just because an FHA borrower cannot get an approve/eligible per AUS does not mean they will not qualify for an FHA Loan. A refer/eligible per automated underwriting system (AUS) means the AUS cannot render an automated approval per AUS. However, the file can get downgraded to an FHA Manual Underwrite.
A refer/eligible means that the automated system cannot determine the risk layers of the borrowers and a human mortgage underwriter needs to manually underwrite the loan.
Not all mortgage lenders can do manual underwriting. The good news is that Gustan Cho Associates are experts in manual underwriting. Over a third of our FHA and VA borrowers are manual underwrites. Compensating Factors are very important in manual underwriting.

In this blog, we will discuss FHA AUS Approval Versus Manual Underwriting on FHA Loans. The only difference between FHA AUS Approval Versus Manual Underwriting is the debt to income ratio requirements. We will delve further on the differences between FHA AUS Approval Versus Manual Underwriting in this blog.

Major Differences Between FHA AUS Approval Versus Manual Underwriting

The major differences between FHA AUS Approval Versus Manual Underwriting are the cap on debt to income ratios. Borrowers can get an approve/eligible per AUS with a maximum front end DTI of 46.9% and back end DTI of 56.9%. However, there are tier level caps with FHA Manual Underwrites.

Here are the three tiers of debt to income ratio caps on manual underwriting on FHA Loans:

• Maximum of 31% front end DTI and maximum 43% DTI of the back end with no compensating factors.
• Maximum 37% DTI front end, and a maximum 47% back end DTI with one compensating factors.
• Maximum 40% front end DTI and 50% back end DTI with two compensating factors.

Compensating Factors are extremely important with manual underwriting. This holds especially true for borrowers with higher debt to income ratios. Compensating Factors are positive factors borrowers have.

Importance Of Compensating Factors With FHA Manual Underwriting Files

Compensating Factors are extremely important with manual underwrites. This is more so with borrowers with higher debt to income ratios.

Lenders view the following as examples of compensating factors:

• Low payment shock of 5% or less and/or $100.
• 3 months of reserves of principal, interest, taxes, insurance (PITI) is considered compensating factors.
• Manual Underwriting files requires one month’s of reserves.
• Reserves cannot be gifted and need to be borrowers own funds.
• Part-time income and/or other income borrower has for at least the past 12 months but not used as qualifying income.
• A larger down payment shows skin in the game.
• History of being able to save money.

Manual Underwriting is similar to FHA AUS Approval underwriting. The biggest hurdle is the debt to income ratio requirements is lower on manual underwrites versus AUS underwrites. For more information on this topic and/or other mortgage-topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.