This BLOG On FHA Manual Underwriting DTI Guidelines On FHA Home Loans Was PUBLISHED On February 12th, 2019
VA and FHA are the two government loan programs that allows manual underwriting.
- Both VA and FHA Manual Underwriting Guidelines are similar
- Loan officers take borrowers application and run credit
- They then input borrowers credit and income profile to either Fannie Mae or Freddie Mac Automated Underwriting System
- Approve/Eligible per AUS is what loan officers hope for
However, borrowers who get a refer/eligible per AUS can still qualify for FHA and/or VA Loans via manual underwriting.
Automated Underwriting System Findings
The Automated Underwriting System (AUS) will render the following:
Approve/Eligible is the key. Lenders with no overlays like Gustan Cho Associates at Loan Cabin just go off the approve/eligible. If borrowers get an approve/eligible per AUS and can meet all conditions, Gustan Cho Associates will close the loan. However, there are times when borrowers cannot get an approve/eligible but rather get a refer/eligible AUS Findings. On cases where borrowers get refer/eligible AUS FINDINGS, it needs to be manually underwritten. Gustan Cho Associates at Loan Cabin Inc. are experts in manual underwriting. Over 20% of all of our loans are FHA and/or VA Manual Underwriting.
On this blog we will cover FHA Manual Underwriting DTI Guidelines On FHA Home Loans.
Importance Of Debt To Income Ratio
Two of the most important factors when qualifying for mortgage is credit and debt to income ratios.
- Credit is important because it shows lenders your payment pattern and financial responsibility
- Debt to income ratio is important
- This is because lenders want to make sure borrowers have the ability to repay their mortgage
- There are maximum debt to income ratio caps on all loan programs
- VA Loans does not have a maximum debt to income ratio on approve/eligible borrowers
- DTI on VA Loans is determined by automated underwriting system
How Mortgage Underwriters Calculate Debt To Income Ratios
Here is how lenders calculate debt to income ratios:
- Take the sum of all monthly debt payments that report on credit bureaus
- Add proposed new housing payment (PITI)
- Take all monthly debt payments including the new proposed PITI and divide it by borrowers monthly gross income
- The resulting figure is the borrowers debt to income ratio
What Are Compensating Factors On FHA And VA Loans
Compensating Factors are important on manual underwriting. Compensating Factors are favorable factors of borrowers.
Per HUD, the following are compensating factors:
Acceptable Compensating Factors per HUD GUIDELINES are limited to the following:
3 months of reserves for 1-2 unit properties
6 months reserves for 3-4 unit properties
New total monthly mortgage payment is not more than $100 and/or 5% higher than previous total monthly housing payment, whichever is less
There is documented 12 monthly housing payment history with no more than one late payment in the past 12 months
Cash-out refinance transactions cannot have any late payments in the past 12 months
Residual income. (See HUD mortgagee letter 2014-02 for details)
Verified and documented significant additional income not considered effective income
Compensating Factors Determine DTI On Manual Underwriting
Debt to income ratios on FHA Manual Underwriting depends on borrowers compensating Factors:
- FHA Manual Underwriting DTI Guidelines depends on borrowers compensating factors
- If borrowers have no compensating factors, the maximum front end DTI is 31% front end and 43% back end DTI
- Borrowers with one compensating factor, FHA Manual Underwriting DTI Guidelines allow 37% front end and 47% back end DTI
- Borrowers with two compensating factors, max front end DTI is 40% and back end DTI is 50%
Exceptions may be made but that is up to underwriter’s discretion.
Borrowers who need to qualify for FHA Loans with direct lender with no overlays, please contact us at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org. the Gustan Cho Team at Loan Cabin Inc. is available 7 days a week, evenings, weekends, and holidays.