HUD Compensating Factors Guidelines On Manual Underwriting


HUD Compensating Factors Guidelines On Manual Underwriting

This BLOG On HUD Compensating Factors Guidelines On Manual Underwriting Was Published On November 25th, 2018

Most lenders require all borrowers get an approve/eligible per AUS in order to proceed with their mortgage process.

  • There are times where Automated Underwriting System will not render an approve/eligible per automated findings
  • Or, in some cases, AUS will only approve borrowers with a much lower DTI than the amount allowed per HUD Guidelines
  • Cases when AUS will not honor HUD Guidelines, borrowers can be downgraded to manual underwriting

Manual Underwriting is only for VA And FHA Loans. Fannie Mae and Freddie Mac does not allow manual underwriting on conventional loans. FHA and VA Manual Underwriting Guidelines are almost the same. Viewers of this blog can apply VA Loans as well.

Refer/Eligible Per Automated Underwriting System Findings


When most lenders deny borrowers when the desktop underwiter, AUS, renders with a refer/eligible per Automated Underwriting System, The Gustan Cho Team at Loan Cabin Inc. can underwrite it via manual underwriting

  • We will explain what Manual Underwrite is on this blog

What Is Manual Underwriting

HUD Compensating Factors Guidelines On Manual Underwriting is the following:

  • To get higher debt to income ratios allowed, HUD requires two compensating factors
  • Compensating Factors need to meet HUD Compensating Factors Guidelines

HUD Compensating Factors Guidelines on manual guidelines has requirements borrowers need to follow regarding late payments last 12 and 24 months.

  • I have covered that in previous post
  • Today I will be covering HUD Compensating Factors Guidelines

What Are Specific HUD Compensating Factors Guidelines

Compensating factors are characteristics that allow you to do purchase at different debt to income ratios.

  • If borrowers stay under or at 31% mortgage payment to gross monthly income (front end DTI) and 43% back end DTI(total monthly debts plus mortgage payment then borrowers) only need 1 month reserves to close their loan
  • The one month reserve is the compensating factor
    • One month reserves is your own money and one full mortgage payment

Debt To Income Ratio Caps Depends On Number Of Compensating Factors

If borrowers stay under 37% front end and 47% back end ratio they need a stronger compensating factor:

I will cover below.

  • If you want to go to the maximum FHA allows for manual underwrite of 40/50 ratios then you need 2 compensating factors

HUD Compensating Factors Guidelines

Compensating Factors are positive factors borrowers have. However, under HUD Compensating Factors Guidelines, the following are considered compensating factors:

  • 3 Months Reserves:
    • Verified and documented 3 months mortgage payments for 1-2 units are considered reserves
    • 6 months mortgage payments for 3-4 units are considered comp factors
    • Gift money cannot be used for reserves
    • It must be borrowers own earned funds

Payment Shock Of 5% Or Less Is Considered Compensating Factors

Verification of Rent is normally required on manual underwrites. If borrower has payment shock of 5% or less, this is a solid compensating factor.

  • New total mortgage payment with taxes, insurance, and PMI cannot exceed 5% of current verified rent payment or $100 dollars whichever is greater to be used as comp factor
  • We need to verify last 12 months mortgage payments with no late payments

Additional Income Of Borrower Not Used As Qualified Income

Verified additional income not being used in debt to income ratios.

  • For example we cannot use overtime, bonuses or part-time income that hasn’t been averaged for 2 years
  • Borrowers who received it for one year this would be a compensating factor
  • Non borrowing spouses income does not count for additional income is another comp factor

Or residual income.

  • This is a formula that you take Gross monthly income and subtract state income taxes, federal taxes, other income taxes, retirement income, new mortgage payment, child care expense and utilities expense
  • Utilities expense is calculated by taking the square footage of house you are buying and multiply by 14
  • Once you have this number refer to chart below
  • You must have more residual income than number in chart


Income as a Compensating Factor (continued) Table of Residual Incomes by Region

Table of Residual Incomes by Region

For loan amounts of $79,999 and below:

Size Northeast Midwest South    West
1      $390         $382         $382      $425
2      $654         $641        $641      $713
3      $788         $772        $772      $859
4      $888         $868        $868      $967
5      $921         $902        $902      $1,004

Family size of over 5 Add $75 for each additional member up to a family of seven

Table of Residual Incomes by Region

For loan amounts of $80,000 and above

Size   Northeast    Midwest    South     West

1         $450             $441          $441       $491
2         $755             $738          $738       $823
3         $909             $889          $889       $990
4         $1,025          $1,003       $1,003    $1,117
5         $1062           $1,039       $1,039    $1,158

Family over 5 Add $80 for each additional member up to a family of seven

All manual underwriting requires one months reserves.

  • So on summary if you are doing a manual underwrite and you are at 31/43 all you need is one month reserves
    If you are going to be at 37/47 borrowers will need one of the above factors plus the one months reserves required on all manual underwriting
  • If you are going to the maximum of 40/50 then you need 2 of the above
  • Please note that unlike most ratios programs the you cannot exceed the front end ratio on a manual underwrite

This BLOG On HUD Compensating Factors Guidelines Was Written And Published By Alex Carlucci of Gustan Cho Associates at Loan Cabin Inc.

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