FHA Manual Underwriting Guidelines On FHA Mortgage Loans

This Article Is About FHA Manual Underwriting Guidelines On FHA Mortgage Loans 

FHA Manual Underwriting Guidelines applies for borrowers who cannot get an approve/eligible per AUS.

  • Borrowers who get referred/eligible per Automated Underwriting System may be able to qualify for manual underwriting
  • Refer/Eligible per AUS means that the automated system cannot render automated approval and approve/eligible per DU FINDINGS but may be eligible to qualify for an FHA loan if it is underwritten by a human mortgage underwriter
  • Only FHA and VA loans allow for manual underwriting
  • Conventional loans cannot be manually underwritten
  • The mortgage underwriter has a lot of underwriter discretion on manual underwriting files
  • The key in getting approved on manual underwrites is timely payments in the past 24 months

What Does Manual Underwriting Mean?

What Does Manual Underwriting Mean?

FHA Manual Underwriting means that a mortgage underwriter will manually underwrite the FHA mortgage loan application. FHA and VA Loans are the only two loan programs that allow manual underwrite. FHA and VA have similar agency mortgage guidelines on manual underwriting:

Careful scrutiny is place on all manual underwriting home loans. The mortgage underwriter has a lot of power and discretion on manual underwrites. The risk level is higher for the lender on all manual underwrites versus AUS approved findings.

On manual underwriting, the mortgage underwriter carefully reviews the following information:

  • borrowers income
  • assets
  • liabilities
  • credit
  • credit scores
  • credit history

The ability to repay the new housing payment is always in the back of the mortgage underwriter’s mind. Underwriters will look for compensating factors the borrower has to offset the layered risk on manual underwrites.

How Mortgage Underwriters Analyze Derogatory Credit Tradelines

Mortgage underwriters will question derogatory credit information, public records, debt to income ratios, and look for compensating factors:

  • Compensating Factors are positive factors borrowers have to offset bad credit or less than perfect financial profile

Examples of compensating factors are the following:

  • reserves
  • longevity on the job
  • verification of rent
  • income such as part-time income that is not used as qualifying income
  • spouse with income but not on the mortgage loan
  • larger down payment
  • other positive factors the borrower has
  • All FHA Loans during and right after Chapter 13 Bankruptcy discharge are all manual underwriting
  • This because the automated underwriting system does not render an automated approval until at least two years has passed from the Chapter 13 Bankruptcy discharged date

Home Buyers can qualify with no waiting period for an FHA Loan after the Chapter 13 Bankruptcy discharged date without any waiting period with a manual underwrite.

Eligibility Of FHA Manual Underwriting

To be eligible for FHA Manual Underwriting, borrowers need timely payments in the past 12 months.

FHA Manual Underwriting Guidelines On Verification Of Rent

FHA Manual Underwriting Guidelines will require borrowers to have verification of rent.

  • Verification Of Rent is only valid if borrowers can provide 12 months of canceled checks and/or 12 months bank statements to the underwriter
  • Borrowers need to have been timely with all rental payments for the past 12 months
  • No 30 day late payments with any rental payments
  • If the borrower has paid their rental payments online, then 12 months of bank statements will be required to validate the verification of rent showing the exact rent payment leaving bank account
  • The landlord also needs to complete a form of rental verification
  • VOR Form will be provided by the mortgage lender

If a borrower is living rent-free with a family member and does not have rental verification, we will exempt the verification of rent requirement.

What Is Payment Shock

What Is Payment Shock

The importance of verification of rent is due to determine payment shock

  • Payment Shock is the proposed new mortgage payment a home buyer will have compared to the monthly rental payments they have been paying
  • If the renter has been paying $1,000 per month in rent and the new P.I.T.I. ( principal, interest, taxes, insurance ) is $1,000, there is zero payment shock

This is because the new mortgage payment is the same as the rental payment the borrower has been paying.

FHA Manual Underwriting Guidelines: Low Payment Shock Is Considered Compensating Factor

If the new proposed housing payment will be $1,200 per month and the old rental payments were $1,000 per month, then the home buyer will have a $200 payment shock or 20%.

  • If the home buyer has been renting and has been paying timely rental payments but was paying with cash, that will not count as verification of rent
  • Renters should always pay their rental payments with checks or online to show documentation
  • Renters renting from a property management company, then bank statements and canceled checks are not required

A verification of rent form which is provided by the lender and completed and signed by the property management company manager will be sufficient in lieu of 12 months canceled checks and/or bank statements.

FHA Manual Underwriting Guidelines On Reserves

On manual underwriting, the mortgage underwriter will most likely want to see three months of reserves by the mortgage loan borrower.

  • One month’s reserves are equivalent to one month’s of P.I.T.I., which is principal, interest, taxes, and insurance as well as HOA fees if applicable
  • FHA allows 100% gifted funds for the down payment and closing costs on a home purchase
  • However, reserves cannot be gifted and need to be the borrower’s own 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.

Qualifying For A Manual Underwrite Mortgage With A Direct Lender With No Overlays

How to qualify for a manual secured loan with no overlays

Home Buyers in need of an aggressive mortgage lender with no mortgage overlays on government and conventional loans and specializing in manual underwriting, please do not hesitate to contact us at 262-716-8151 or text us for a faster response. Or email us at [email protected] We are specialists in both VA and FHA manual underwriting. We help many folks who just recently gotten a Chapter 13 Bankruptcy discharge without any waiting period after the discharged date.

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  • My bankruptcy chapter 7 more discharge in one month, and July I am looking to purchase a home but I’m stuck in the waiting guidelines of conventional loans. I am trying to find a loan that I could be approved for before a two years waiting time.

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