FHA DTI Ratios on Manual Underwrites Mortgage Guidelines

This blog will cover the FHA DTI ratios on manual underwrites mortgage guidelines. The main difference between manual versus automated underwriting system guidelines is the debt-to-income ratio cap on manual underwriting.

FHA DTI ratios on manual underwrites have caps on front-end and back-end debt-to-income ratio depending on the number of compensating factors. Debt-to-income ratio cap on FHA manual underwriting is lower than the debt-to-income ratio on automated underwriting system FHA loans.

Debt-To-Income Ratio is among the most important factors when qualifying for a mortgage loan. Debt-to-income ratios, commonly referred to as DTI, Debt To Income Ratios, also known as DTI, is the sum of all monthly minimum monthly payments, including the proposed principal, interest, taxes, and insurance (P.I.T.I.) of the new property divided by the borrower’s monthly gross income. In the following sections, we will cover the FHA DTI ratios on manual underwrites mortgage guidelines.

Maximum FHA DTI Ratios on Manual Underwrites Versus AUS Approvals

Mortgage loan programs have their maximum debt-to-income ratio limits. FHA Guidelines on debt-to-income ratio are capped at 46.9% DTI front-end and 56.9% DTI back-end for borrowers with 620 FICO or higher credit scores.

For FHA Borrowers With Under 620 FICO Credit Scores, the debt-to-income ratio caps on FHA loans can get reduced to 43% DTI to get an approve/eligible per the automated underwriting system.

The front-end debt-to-income ratio caps on FHA Borrowers With Credit Scores Under 620 FICO depend on the number of compensating factors the borrower has. Borrowers With Under 620 FICO credit scores are classified as higher-risk borrowers. Lower credit score borrowers will get higher mortgage rates. Borrowers with under 620 credit scores may require verification of rent by the Fannie Mae Automated Underwriting System.

Debt-To-Income Ratio Guidelines on Conventional Loans

Fannie Mae and Freddie Mac guidelines on debt-to-income ratios, the maximum debt-to-income ratio limits are capped at 50% DTI to get approve/eligible per DU FINDING or LP FINDINGS. In the following sections of this article, we will discuss FHA and Conventional loans and their debt-to-income ratio requirements.

The two biggest factors affecting mortgage loan debt-to-income ratios are auto and student loans.

One benefit of conventional and FHA loans is that Income-Based Repayment (IBR) is allowed as long as it reports on all three credit bureaus. HUD, the parent of FHA, has recently updated its guidelines on student loans and allowed IBR Payments. 0.50% of the outstanding student loan balance is a hypothetical monthly debt on FHA loans.

FHA DTI Ratios on Manual Underwrites Versus Automated Approvals

FHA permits manual underwriting on loan applications that cannot get approve/eligible per DU FINDINGS and get referred/eligible per DU FINDINGS.

There are instances where an approve/eligible per AUS loan application need to get downgraded to manual underwriting due to underwriter discretion.

Not all lenders do manual underwrites. Manual Underwriting is when an FHA mortgage underwriter manually underwrites loan applications instead of going by the Fannie Mae Automated Underwriting System, or AUS. Twelve months of timely payments are required on all manual underwriting. Verification of Rent is required on manual underwriting. Compensating Factors are required on manual underwrites.

FHA Loan During And After Chapter 13 Bankruptcy Mortgage Guidelines

There are mortgage loan applications that must be manually underwritten. For example, all FHA loans after Chapter 13 Bankruptcy discharge that has less than two years after the Chapter 13 Bankruptcy discharge needs to be manually underwritten. With all manual underwrites, verification of rent is mandatory

Verification of Rent is only useful and valid when the renter can provide 12 months of canceled checks that he or she had paid the landlord. Or 12 months’ bank statements proving that the funds have been transferred from the renter’s bank account into the landlord’s bank account and have been timely for the past 12 months with no late payments. If the renter has been paying cash to the landlord and gets cash paid receipt from the landlord, that does not count for verification of rent purposes

Borrowers have to understand that cash does not count in the mortgage industry. All income, deposits and receipts need to be documented by canceled checks, and cash deposits cannot be used for income qualification and credit qualification purposes. With manual underwriting, the mortgage underwriter has a lot of underwriter’s discretion. The mortgage underwriter will look for compensating factors.

What Are Compensating Factors For Manual Underwrites

Compensating Factors are positive factors that give strength, such as the following:

• reserves
• additional documented income, such as part-time income
• bonus income
• overtime income that the borrower has but was not used as qualifying income
• Larger down payment and higher credit scores are strong compensating factors.
• Borrowers who are in the healthcare fields
• Borrowers employed by the government, such as law enforcement officers and firefighters, and school teachers with job longevity, is considered compensating factors.
• This is because of the demand for employment in those fields
• Multiple jobs and gaps in employment are considered less than favorable factors

Mortgage underwriters will take that into account when underwriting a manual underwrite.

Maximum FHA DTI Ratios on Manual Underwrites

Unlike the automated underwriting system, no debt-to-income ratio requirements and caps on FHA Manual Underwrites exist. However, most underwriters do not want borrowers to exceed 50% DTI. Most mortgage underwriters like to see a debt-to-income ratio of no higher than 43% DTI, but nothing is set in stone. I have seen a recent manual underwriting borrower get approved with a 53% DTI. The borrower has strong compensating factors, such as a second full-time job as a nurse.

• First job as a nurse she was with her first employer for over 14 years and started her second full-time job as a professor of nursing 18 months ago. However, the second full-time job could not be used for qualifying income due to not having a two-year seasoning. The mortgage underwriter saw this as a strong compensating factor and approved the manual underwriting mortgage loan application with a 53% back-end debt-to-income ratio.

Homebuyers needing a direct lender specializing in manual underwriting, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text for faster response. Or email us at gcho@gustancho.com. We are available seven days a week, evenings, weekends, and holidays to take your phone calls and answer your questions on manual underwriting case scenarios or other mortgage loan case scenario questions.