FHA Downgrade To Manual Underwriting on FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover mortgage lenders going about an FHA downgrade to manual underwriting on FHA mortgage loans.
This article will cover an extensive easy to understanding of the mechanics of FHA downgrade to manual underwriting on FHA home loans. Lenders can do VA and FHA downgrade to manual underwriting on borrowers who got an approve/eligible per automated underwriting system.

Mortgage underwriters have the discretion to downgrade an AUS-approved borrower to a manual underwrite due to high risk. FHA and VA loans are the only two mortgage programs that allow manual underwriting. Manual underwriting is when a borrower cannot get approve/eligible per an automated underwriting system (AUS). In the following paragraphs, we will discuss FHA downgrade to manual underwriting on FHA loans.

What Is Required For Manual Underwriting?

Borrowers who get a refer/eligible per automated underwriting system are eligible for manual underwriting on FHA and VA loans. Another instance when a manual versus automated underwriting is required is when the mortgage underwriter downgrades an AUS-approved borrower to manual underwriting. Not all lenders do manual underwriting. Gustan Cho Associates Mortgage Group does a lot of manual underwriting on FHA and VA loans.

FHA Loans While In Chapter 13 Bankruptcy Guidelines
Chapter 13 Bankruptcy Guidelines

Borrowers who are in a current active Chapter 13 repayment plan need to be manually underwritten on FHA and VA loans. Those with a Chapter 13 bankruptcy discharge without the discharged date seasoned for 24 months need to be manually underwritten. There are other instances when a mortgage needs to be manually underwritten. In this article, we will discuss and cover FHA Downgrade To Manual Underwriting On FHA Loans.

Does FHA Allow For Manual Underwriting?

All refer/eligible per automated underwriting system (AUS) findings are eligible for manual underwriting on FHA and VA loans. What refer/eligible means is the borrower may qualify for a government and/or conventional loan. However, the automated underwriting system cannot render an approve/eligible finding. The file needs to have a human mortgage underwriter fully review, process, and underwrite the file.

What Triggers a Manual Underwriting Downgrade
Manual Underwriting Downgrade

There are cases when a file gets downgraded to a manual underwrite: The mortgage file contains information or documentation that cannot be entered into or evaluated by the TOTAL Mortgage Scorecard. Additional information, not considered in the Automated Underwriting System (AUS) recommendation affects the overall insurability of the Mortgage. The borrower has credit disputes on non-medical credit tradelines with an aggregate balance of $1,000 or more. The borrower has bankruptcy that has not been seasoned for at least 24 months from the date of case number assignment.

What Is The Waiting Period For Foreclosure?

Michael Gracz of Gustan Cho Associates added the automated underwriting system will render a refer/eligible and/or refer/ineligible if the AUS determines a borrower has a housing event and cannot determine the final date of the housing event:

The borrower has a housing event (foreclosure, deed in lieu of foreclosure, short-sale) that has not been seasoned for at least three years from the transfer of title through a Pre-Foreclosure Sale (Short Sale). The case number assignment date is within three years of the date of the transfer of title through a foreclosure sale. The case number assignment date is within three years of the date of the transfer of title through a Deed-in-Lieu (DIL) of foreclosure. The Mortgage Payment history, for any Mortgage tradeline reported on the credit report used to score the application, requires a downgrade as defined in Handbook 4000.1 II.A.4.b.iii (K) – Housing Obligations/Mortgage Payment History. The Borrower has undisclosed mortgage debt that requires a downgrade

Borrowers who get an approve/eligible but had an income decline over 20% from the previous year need to be downgraded to a manual underwrite. If the mortgage underwriter decides to downgrade an AUS file to a manual underwrite, the underwriter must follow all manual underwriting guidelines.

What Are The FHA Underwriting Guidelines?
FHA Underwriting Guidelines

There is not too much difference between automated versus manual underwrites. The mortgage underwriter will scrutinize a manual underwrite more so than an AUS-approved borrower.

Here are the basic FHA Manual Underwriting Guidelines:

What Is The Lowest Credit Score FHA Will Accept?
The Lowest Credit Score FHA Will Accept

Gustan Cho Associates will approve VA and FHA loans with credit scores down to 500 FICO. Verification of rent is required on FHA manual underwriting.. Gustan Cho Associates will allow borrowers without rental verification if they have been living rent-free with family. The rent-free letter form is provided by the lender and needs to be completed, signed, and dated.

The maximum debt to income ratio with no compensating factors is 31% front end and 43% back end. Maximum DTI with one compensating factor is 37% front end and 47% back end. Maximum DTI with two compensating factors is 40% front end and 50% back end.

Can I Qualify For a Mortgage While in Chapter 13?

Borrowers can qualify for FHA and VA loans during the Chapter 13 repayment plan. Chapter 13 bankruptcy does not need to be discharged. Trustee approval is required. There is no waiting period after Chapter 13 bankruptcy to qualify for FHA and VA loans. However, any discharge after Chapter 13 bankruptcy that has not been seasoned for at least 24 months from the discharged date needs to be manually underwritten on FHA and VA loans.

Borrowers who need an FHA and/or VA loan that need to be manually underwritten, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at GCA Mortgage Group is available 7 days a week, on evenings, weekends, and holidays.

This blog on FHA Downgrade to Manual Underwriting was updated on July 19, 2022