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FHA Manual Underwriting Mortgage Guidelines And Requirements

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FHA Manual Underwriting Mortgage Guidelines And Requirements

This BLOG On FHA Manual Underwriting Mortgage Guidelines And Requirements Was UPDATED On June 15th, 2019

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

There is no dead set in stone requirements with FHA Manual Underwriting Mortgage Guidelines. Manual Underwriting is when a mortgage loan application cannot get an approve/eligible per Automated Underwriting System and the Automated Underwriting System yields a referred/eligible per Automated Findings .

  • Referred means that the automated system cannot issue an automated approval with the information
  • The data entered in the automated approval system cannot render an automated underwriting system approval
  • Eligible means that the mortgage loan application is eligible for a mortgage loan approval 
  • Refer means that the file needs to be referred to a human mortgage underwriter

What Does Manual Underwrite Mean

Manual Underwriting means that the mortgage file is assigned to a mortgage underwriter and has to be manually underwritten by a human underwriter:

  • The mortgage underwriter will review the whole mortgage loan application
  • The underwriter will look for derogatory credit information
  • They will analyze the credit risk surround the derogatory credit items and look for compensating factors which are positive 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 2019 FHA 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 2019 FHA Manual Underwriting Mortgage Guidelines

There are no specific requirements with 2019 FHA Manual Underwriting Mortgage Guidelines and a lot of deciding factors relies on mortgage underwriter discretion.

  • One of the most important factors most mortgage underwriters require is rental verification and 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
  • 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
  • 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

The lowest credit scores allowed to qualify for a 3.5% down payment home purchase FHA Loan is 580 credit scores.

  • Mortgage lenders like myself have no FHA mortgage lender overlays 
  • Manual underwriting mortgage loans with credit scores as low as 580 credit scores
  • 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 faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take calls and answer any questions.

2019 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 require verification of rent.

NEW HUD guidelines on manually underwritten loans

The 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

Debt Ratio Limits On All FHA Manual Underwriting 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 is 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 2018 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 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 maximum back end is capped at 40% DTI

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 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 The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.

  1. barbra caranza says

    Fantastic suggestions . For my two cents if people want a LCPIA Verification of Rental History Form.

    Massimo Ressa
    Chief Executive Officer
    Gustan Cho Associates
    Email gcho@loancabin.com
    Web: http://www.gustancho.com

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