HUD Derogatory Manual Underwriting Guidelines On FHA Mortgages

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HUD Derogatory Manual Underwriting Guidelines On FHA Mortgages

This ARTICLE On HUD Derogatory Manual Underwriting Guidelines On FHA Mortgages Was PUBLISHED On November 14th, 2019

HUD Derogatory Manual Underwriting Guidelines
Gustan Cho Associates

FHA Loans is the best loan program for borrowers with less than perfect credit.

  • Manual underwriting is only allowed on FHA and VA Loans
  • In the event, if a borrower cannot get an approve/eligible per automated underwriting system and gets a refer/eligible per AUS, then the file can get downgraded to a manual underwrite
  • There is not much difference between automated versus manual underwriting
  • Manual underwriting means a human underwriter thoroughly reviews the file more so than an automated underwriting system file
  • Emphasis is placed on compensating factors and the lender’s layers of risk
  • Debt to income ratios and timely payments are important factors on manual underwriting
  • HUD Derogatory Manual Underwriting Guidelines state borrowers do not have to pay outstanding collections and charged-off accounts to qualify for FHA Loans
  • However, in general, manual underwriting requires timely payments in the past 24 months
  • One or two late payments are not deal killers
  • At Gustan Cho Associates, we have helped borrowers with late payments in the past 24 months get approved on manual underwriting
  • A good letter of explanation is required
  • The loan officer can help borrowers with writing a good letter of explanation on derogatory credit in the past 24 months

In this article, we will cover and discuss HUD Derogatory Manual Underwriting Guidelines On FHA Mortgages.

HUD Agency Mortgage Guidelines On AUS Versus Manual Underwriting

What are HUD Agency Mortgage Guidelines On AUS Versus Manual Underwriting

There are two different types of lending guidelines.

  • The first and most important is the HUD Agency Guidelines
  • All lenders need to have their borrowers meet the minimum agency guidelines by HUD
  • The second guidelines on FHA loans are lender overlays
  • Overlays are additional lending requirements imposed by the lender
  • Every lender can have higher lending requirements on FHA loans than the minimum required by HUD
  • Gustan Cho Associates is one of the few national direct lenders with no lender overlays on FHA loans

We just go by the minimum HUD Guidelines and have zero lender overlays. In the following paragraph, we will cover agency guidelines versus typical lender overlays.

HUD Agency Guidelines Versus Lender Overlays

What are HUD Agency Guidelines Versus Lender Overlays

In this paragraph, we will compare and contrast the minimum HUD Agency Guidelines versus typical lender overlays imposed by lenders:

Here are the minimum agency FHA Guidelines versus common lender overlays:

The minimum FHA Credit Score Requirement on a 3.5% down payment home purchase loan is 580 FICO:

  • Most lenders will have a 620 to 640 FICO credit score requirement as part of their overlays

Borrowers can qualify with credit scores under 580 down to 500 FICO:

  • Most lenders will not touch any borrowers with under 580 credit scores as part of their lender overlays
  • Gustan Cho Associates will approve borrowers with 500 FICO as long as they can get an approve/eligible per AUS

Outstanding Collections and Charged-Off Accounts do not have to be paid to qualify for an FHA loan:

  • Most lenders will require borrowers to pay outstanding collections and/or charged-off accounts as part of their overlay

Manual Versus Automated Underwriting System

What is Manual Versus Automated Underwriting System

Manual Versus Automated Underwriting System Approval:

  • A lot of lenders will not do manual underwriting
  • Borrowers in Chapter 13 repayment plan can get approved with a manual underwrite without having their bankruptcy discharged
  • Borrowers with Chapter 13 bankruptcy discharged with less than 2-year seasoning after their discharged date can qualify for FHA loans with manual underwriting
  • Compensating factors are important on manual underwriting for borrowers with higher debt to income ratios

There are no major differences between manual versus automated underwriting system approvals. The only major differences are with manual underwriting, the debt to income ratios is lower than AUS.

HUD Derogatory Manual Underwriting Guidelines On Late Payments, Collections, Charged-Off Accounts

What are HUD Derogatory Manual Underwriting Guidelines On Late Payments, Collections, Charged-Off Accounts

The key to manual underwriting is timely payments in the past 24 months.

  • One or two late payments in the past 24 months are not viewed favorably by mortgage underwriters
  • However, one or two late payments in the past 24 months is not always a deal killer
  • Collections and charged-off accounts that has been aged for at least 24 months are not issues

The collections and charged-off accounts that have been aged for at least 24 months but recently hit the borrower’s credit reports are allowed.

Qualifying For A Mortgage With A Direct Lender With No Overlays

How Qualifying For A Mortgage With A Direct Lender With No Overlays

Borrowers who need to qualify for an FHA Loans with a manual underwrite, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. We are direct lenders with no lender overlays on government and conventional loans.

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