FHA Manual Underwriting Mortgage Guidelines And Requirements

This BLOG On FHA Manual Underwriting Mortgage Guidelines And Requirements Was UPDATED And PUBLISHED On November 1st, 2020

FHA Manual Underwriting Mortgage Lending Guidelines And Definition Of Compensating Factors Explained:

FHA and VA loans are the only two home mortgage programs that allow manual underwrite.

  • Manual underwriting is when the automated underwriting system (AUS) cannot render an approve/eligible and renders a refer/eligible
  • Refer/eligible findings is when the automated underwriting system (AUS) finds the borrower eligible but cannot determine a solid automated approval
  • Refer/eligible means the file is referred to a human mortgage underwriter for a full in depth manual underwrite
  • There are general manual underwriting guidelines on both FHA and VA loans
  • FHA and VA manual underwriting guidelines are similar with regards to credit and debt to income ratio guidelines
  • However, there is no dead set in stone requirements with FHA Manual Underwriting Mortgage Guidelines
  • Mortgage underwriters have a great deal of discretion on manual underwriting files

Manual Underwriting is when a mortgage loan application cannot get an approve/eligible per Automated Underwriting System.

Automated Underwriting System Referring File To Manual Underwriting

What is an Automated Risk Assessment System directing the file for Manual Risk Assessment

FHA and VA loans are the only two mortgage program that allow manual underwriting. Conventional loans with a refer/eligible AUS findings cannot be downgraded to a manual underwrite.  A mortgage loan applicant can get their file downgraded to an FHA and/or VA manual underwrite if the Automated Underwriting System cannot get an approve/eligible but yields a referred/eligible per Automated Findings.

  • Referred means that the automated system cannot issue an automated approval with the information
  • Refer/eligible findings is when the data entered in the automated underwriting system cannot render an approve/eligible AUS approval
  • Eligible means that the mortgage loan application is eligible for a mortgage loan approval 
  • Refer means that the file needs to be downgraded to a manual underwrite and referred to a human mortgage underwriter

In this article, we will cover and discuss FHA Manual Underwriting Mortgage Guidelines.

What Does Manual Underwrite Mean

Manual Underwriting means that the mortgage file cannot be approved by the automated underwriting system (AUS). However, the file can be assigned to a human mortgage underwriter and has to be manually underwritten:

Not all lenders do manual underwrite. However, Gustan Cho Associates are experts in doing manual underwriting.

  • Timely payments in the past 24 months is key on all manual underwrites
  • The mortgage underwriter will thoroughly review the whole mortgage loan application
  • The underwriter will look for derogatory credit information and what the borrower has done to rebuild and reestablish credit after the period of bad credit, bankruptcy, and/or a housing event if applicable

They will analyze the credit risk surround the derogatory credit items. The mortgage underwriter will look for compensating factors which are positive factors.

List Of Compensating Factors

Examples of compensating factors are:

  • Reserves
  • Low payment shock through verification of rent
  • Longevity in the job, larger down payment
  • Additional income not used as qualified income
  • Part-time income borrower has for at least a year but not used as qualified income
  • Other positive factors that show the strength of the mortgage loan borrower
  • Lenders view lower credit score borrower’s as higher risk

Under 620 credit scores, HUD manual underwriting mortgage guidelines state that the mortgage underwriter has discretion in assessing the risk of the borrower when deriving to a decision on whether to issue a mortgage loan approval or not.

Requirements With 2020 FHA Manual Underwriting Mortgage Guidelines

There are no specific requirements with the 2020 FHA Manual Underwriting Mortgage Guidelines. Many of deciding factors rely on mortgage underwriter discretion.

  • One of the most important factors most mortgage underwriters require is rental verification
  • Compensating Factors on payment shock is when less than 5% payment shock or $100 increase from the rental expense to new housing payment, whichever is less
  • Rental verification is only valid if the renter can provide 12 month’s canceled checks where he or she has paid their rental payments with a bank check
  • In lieu of 12 months of canceled rental payment checks, the renter can also provide 12 month’s bank statements if they have paid it online
  • Cash rental payment does not count as verification of rent
  • A paid receipt from the landlord is not valid unless the renter has proof of payment via canceled checks and/or bank statements
  • If the renter has leased their apartment or home from a registered property management company, then a verification of rent form provided by the lender to the property management company can be used in lieu of canceled checks and/or bank statements

All rental payments in the past 12 months need to have been on time and no 30 day late payments on their monthly rents are allowed.

FHA Manual Underwriting Guidelines On Credit Scores And DTI

Requirements With 2019 FHA Manual Underwriting Mortgage Guidelines

The lowest credit scores allowed to qualify for a 3.5% down payment home purchase FHA Loan is 580 credit scores. Per HUD Agency Mortgage Guidelines, borrowers with under 580 FICO and down to a 500 credit score can qualify for an FHA loan but need a 10% versus a 3.5% down payment:

  • Mortgage lenders like myself have no FHA mortgage lender overlays 
  • Manual underwriting mortgage loans with credit scores as low as 580 credit scores for a 3.5% down payment home purchase FHA loan
  • Manual underwriting with under a 580 credit score and down to a 500 FICO can be done but the borrower needs a 10% down payment if they have under 580 FICO per HUD Agency Mortgage Guidelines

However, most lenders do have overlays on credit scores with manual underwriting loans where they want a minimum credit score of at least 640 credit scores.

HUD Guidelines On Debt To Income Ratio On Manual Underwriting

Most mortgage lenders normally prefer borrower’s debt to income ratios on manual underwrites at 43% DTI:

  • FHA Manual Underwriting Mortgage Guidelines does have a tier on debt to income caps depending on borrower’s credit scores
  • Compensating Factors will increase debt to income ratio cap requirements
  • I have done and closed on manual underwriting mortgage loan files with debt to income ratios up to 50% DTI
  • However, manual underwriters will look for strong compensating factors when underwriting a manual underwrite

Borrowers who are looking for an FHA mortgage lender with no Lender Overlays specializing in manual underwriting, please contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays to take calls and answer any questions.

2020 Update On HUD Manual Underwriting Guidelines

Manual Underwrites are becoming very popular.

  • There are instances where an approve/eligible per AUS FINDINGS loan applicant will get downgraded to a manual underwrite such in cases where there are credit disputes
  • All manual underwriting requires verification of rent
  • Gustan Cho Associates will exempt verification of rent if the borrower is living rent free with family in order to save money for the down payment and closing costs on a home purchase
  • Borrowers with higher debt to income ratios need compensating factors
  • The maximum debt to income ratio caps on manual underwrites on FHA loans is 40% front end and 50% back end debt to income ratios

The above bullet points below apply to all manually underwritten FHA Loans

HUD Mortgagee Letter 2014-02 RESERVES REQUIRED on all manually underwritten loans.

  • 1-month reserves are required on all 1-2 unit properties on manually underwritten FHA Loans
  • 3 months reserves are required on all 3-4 unit properties with manually underwritten FHA Loans

Automated Approved FHA Loans debt to income ratios are 46.9% DTI front end and 56.9% DTI back end on borrowers with credit scores 620 and higher. Borrowers with credit scores under 620, maximum DTI requirements are capped at 43% DTI for an automated underwriting system approval.

HUD Manual Underwriting Guidelines

Below is the manually underwritten debt to income ratio requirements PER 2020 HUD GUIDELINES ON MANUAL UNDERWRITING:

  • Borrowers with credit scores under 580 or borrowers who need to be underwritten with non-traditional credit, the maximum debt to income ratio required are 31% front end and 43% DTI back end
  • Borrowers with at least a 580+ credit score with NO compensating factors, the maximum front end debt to income ratio is 31% DTI and 43% DTI back end
  • Borrowers with at least a 580 credit score and ONE compensating factor, the maximum front end debt to income ratio is 37% DTI and the maximum back end debt to income ratio is 47% DTI
  • Borrowers with at least a 580+ credit score with TWO compensating factors, the maximum front debt to income ratio is 40% DTI and maximum back end DTI is 50% DTI 

Borrowers with at least a 580+ FICO credit score with NO discretionary debt, the maximum front end debt to income ratio is capped at 40% DTI and the maximum back end is capped at 40% DTI.

HUD Guidelines On Compensating Factors

HUD Guidelines On 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
  • The new total monthly mortgage payment is not more than $100 and/or 5% higher than the 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

All manual underwriting requires timely payments in the past 12 months. Borrowers who need a direct lender with no overlays on FHA Loans and can do manual underwriting on FHA and VA Loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com.

4 Comments
  1. Julie Johnson says

    Hey there,
    My name is Julie Johnson, I ran across your info online last year at Gustan Cho Associates and have been a fan of both your daily blogs written by Gustan Cho as well as other mortgage professionals. I have also been an avid fan of Alex Carlucci of Gustan Cho Associates of his informational videos on mortgage guidelines on YouTube. I think both Gustan Cho and Alex Carlucci are phenomenal, professional, knowledgeable, and know their stuff. I have a few questions. We are looking to buy a house that a builder is presenting as a new build on a lot, they will carry the construction loan so we won’t close until it is finished. However we have an issue of late payments on my previous mortgage from this last winter, Jan, Feb, March. We build and sold a house as an investment, our house sold and closed March 18th 2020. When we were selling our house with a long close, a mold issue became present, we tried to get the builder to fix it but they said no, so we were advised to hold onto our money in case we needed to pay for it out of pocket before the close date, the amount was going to be $18k. At the time I wasn’t working due to a rough pregnancy. So we held our money in case we needed to fix the mold issue out of pocket prior to closing which resulted in the late payments. My question is, do we have to wait until March 2021 to apply for a new loan? The house we are looking at would take 4-6 months to build so we wouldn’t close until after the March 2021 date anyway. But I know we would need to be pre approved first to even get our offer accepted. I’m wondering what our options are if any? I know if anyone can do it Gustan Cho Associates can.
    Thank you for your time!

  2. Gustan Cho, NMLS 873293 says

    I will have my Associate George Makoutz call you shortly. You can have up to two times 30 with FHA and one times 30 with VA and Conventional loans and still get an AUS approval. Again, depending on your overall credit profile, it is possible to get an approve/eligible per automated underwriting system. Worst can scenario, I know you will get an AUS approval with one thirty day late payment on your mortgage so just wait it out until you just have one thirty day late.

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  4. Manual Hernandez

    Was declined from manual underwriting due to a late payment. Already under contract and had been working with this lender on an FHA loan for 2+ months. My income alone is over $200k. Please help

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