HUD DTI Guidelines on Manual vs AUS findings on FHA loans were updated with the new revised HUD’s FHA 4000.1 Handbook. The United States Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA). FHA loans are the best mortgage loan program for borrowers with high debt to income ratios. HUD has the most generous debt to income ratio requirements on FHA loans out of any mortgage loan program.
What Is The Minimum Credit Scores To Qualify For FHA Loans
Credit and Income are the two most important factors when it comes to qualifying for FHA loans as well as other mortgage programs. However, people need to realize that when push comes to shove, income is more important than credit when it comes to qualifying for a mortgage. Borrowers can have the most perfect credit on this planet, have the best credit scores possible, have substantial assets, and the large down payments to put down on the home purchase. But if the borrower has little to no documented income, then they will not qualify for a mortgage.
Importance of Qualified Income To Determine The Ability To Repay on FHA Loans
On the flip side, the borrower can have the following and qualify for a mortgage as long as they have qualified income:
- prior bad credit
- open outstanding collection accounts
- prior bankruptcy
- prior foreclosure
- charge off accounts
Borrowers can have the above but as long as they have qualified income with the likelihood of continuation for the next three years, they can qualify for a mortgage.
Benefits Of FHA Loans For Homebuyers With Bad Credit
FHA loans are the most popular mortgage program in the nation due to the lenient mortgage guidelines. HUD, the parent of FHA, has created more lenient agency mortgage requirements than other loan programs. It is easier to get an approve/eligible per automated underwriting system (AUS) on FHA loans than in any other loan program. FHA loans are ideal for homebuyers who are first-time homebuyers with less than perfect credit with higher debt to income ratios.
HUD DTI Guidelines on Manual vs AUS findings On FHA and VA Loans
HUD and the VA are the only two agencies that allow for manual underwriting on FHA and VA loans. Manual underwriting is when a borrower cannot get an automated approval via AUS and gets a refer/eligible per AUS. Manual underwriting is when a human mortgage underwriter will manually underwrite the loan.
FHA and VA Manual Underwriting Guidelines
The manual underwriting guidelines on FHA and VA loans are exactly the same. The only difference between HUD DTI Guidelines on Manual vs AUS findings on FHA loans is the debt to income ratio on manual underwriting is lower than the AUS DTI limits. HUD DTI Guidelines on Manual vs AUS findings limits depend on the number of compensating factors the borrower has.
FHA Loan Requirements on Collection Accounts
HUD is extremely generous when it comes to bad credit and low credit scores with collections. Borrowers can qualify for a 3.5% down payment home purchase FHA Loan with a credit score as low as 580 FICO. Homebuyers with credit scores between 500 and 579 can qualify for FHA Loans as long as they can put a 10% down payment on their home purchase. Borrowers can qualify for FHA Loans with outstanding collections and charged-off accounts without having to pay them off.
How Is Debt To Income Ratio Calculated By Lenders
Debt To Income Ratio, also referred to as DTI, is calculated by adding the total sum of all monthly debt payments which includes the new proposed P.I.T.I. (Principal, Interest, Taxes, Insurance), and dividing it by the mortgage loan borrower’s monthly gross income. This will yield the back-end debt to income ratio. The front-end debt to income ratio is the P.I.T.I. divided by the borrower’s gross monthly income.
What Monthly Debts Are Calculated By Underwriters For DTI Calculations
Monthly debt payments include all monthly minimum payments such as the following:
- minimum credit card payments
- auto loan payments
- minimum monthly student loan payment
- installment loans
- written payment agreement payments such as minimum payment agreement payments to the IRS or judgment creditors
- child support payments
- alimony payments
- any other monthly debt payments
Monthly expenses such as utilities, auto, health insurance, and cellular phone payments are not calculated in the debt to income ratio calculations.
Maximum Cap on HUD DTI Guidelines on Manual vs AUS Findings
The maximum front-end debt to income ratio is 46.9% and the maximum back-end debt to income ratio is capped at 56.9% The 46.9/56.9% DTI is the ratio required to get an approve/eligible per Automated Underwriting System. If credit scores fall below 620 credit scores, it is up to the automated underwriting system whether the finding renders an approve/eligible per Automated Underwriting System Approval. Those who have a higher debt to income ratio and have credit scores below 620 should consider trying to boost their credit scores so they will go over the 620 credit score mark. The higher the credit scores, the lower the mortgage rates.
Maximum DTI Cap on HUD DTI Guidelines on Manual vs AUS findings
FHA Guidelines On Debt To Income Ratio on manual underwriting depends on the number of compensating factors the borrower has. In manual underwriting, the underwriter has a lot of underwriter discretion. In general, the manual underwriting guidelines are not set in stone. It is a recommended guideline by HUD. Borrowers can go up to a 40% front end and 50% back end with two compensating factors on FHA manual underwrites.
Maximum Debt To Income Ratio Versus Compensating Factors on FHA Manual Underwriting
Mortgage underwriters can allow borrowers to go over the 50% debt to income ratio recommended guideline on manual underwrites if there are multiple compensating factors. Compensating Factors are factors that are favorable. Verification Of Rent is required on all manual underwriting. No late payments in the past 12 months with manual underwriting.
Factors That Can Be Used As Compensating Factors By Mortgage Underwriters
Examples of compensating factors are the following:
- such as having reserves
- larger down payment
- additional income the borrower has but is not using to qualify
- verification of rent with low payment shock
- aged multiple credit tradelines
- other positive factors
How Does Collection Accounts Affect Debt To Income Calculations
FHA Guidelines On Debt To Income Ratio exempt medical collection accounts with outstanding balances and charge off accounts from debt to income calculations. However, this does not hold true with non-medical collection accounts if the borrower has more than $2,000 in total outstanding collections. FHA requires that if the borrower has over $2,000 in outstanding collection accounts that are non-medical, then 5% of the outstanding collection account balance needs to be used in debt to income ratio calculations of the borrower. The borrower does not need to make any payments. FHA does not require the borrower to pay off or make any payment agreement with the creditor and/or collection agency.
Comparison of FHA Lenders and The Lender Overlays
There are two types of mortgage lending guidelines on FHA loans:
- HUD Guidelines
- FHA Lender Overlays
Gustan Cho Associates are mortgage professionals experts in helping home loan borrowers secure FHA Loans With High DTI. There are many home buyers with prior bad credit, lower credit scores, and higher debt to income ratios who are told they do not qualify for FHA Loans due to lender overlays where in fact they do qualify. HUD (The U.S. Department of Housing & Urban Development) is the parent of FHA (Federal Housing Administration).
FHA Minimum Credit Score & DTI Requirements
Every loan program has a minimum credit score requirement. Borrowers who have a minimum of a 580 credit score can qualify for an FHA loan with a 3.5% down payment. Most lenders require a minimum credit score of 640 FICO while a select few might have a 620 minimum credit score requirement. Higher than 580 credit score requirement is not a HUD Guidelines but rather Lender Overlays. FHA Lender Overlays are mortgage requirements that a Lender imposes on top of the minimum credit scores required by HUD.
FHA Lender Overlays Explained
A borrower can also have open collection accounts that do not need to be paid off. Most Lenders will most likely want you to pay off collection and judgments as well as have a minimum credit score of 640. We do have a restriction on judgments. I can finance you with outstanding judgment. However, you would need to have a payment plan in effect. It does not matter how much your payment is. It can be as little as $20.00 per month on a million-dollar outstanding judgment but there has to be an agreed payment plan. The 3.5% down payment can be gifted by a family member. The seller can contribute up to 6% of the closing costs.
VA Minimum Credit Score & DTI Requirements
The Department of Veteran Affairs (VA) is the government agency that insures and guarantees VA Loans. VA does not have a minimum credit score requirement. As long as the borrower has been timely for the past 12 months with strong residual income, the borrower should get an approve/eligible per automated underwriting system (AUS). Borrowers who cannot get an approve/eligible per automated underwriting system but get a refer/eligible per AUS may qualify for a manual underwrite. Manual underwriting guidelines apply.
Manual Underwriting Guidelines on Late Payments
One of the key manual underwriting requirements is borrowers need to have been timely for the past 24 months. However, Gustan Cho Associates is very pro-military and will help borrowers with only 12 months of timely payments to qualify for a VA manual underwrite. Most VA Lenders have lender overlays on credit scores. It is up to the individual lender to set what their minimum credit scores are. Many will have lender overlays of 620 to 640 while others will have a 580 FICO credit score overlay on VA loans.
Fannie Mae & Freddie Mac Minimum Credit Score & DTI Requirements
Fannie Mae and Freddie Mac are the two mortgage giants that set standards for Conventional loans. Conventional Loans are called conforming loans. This is because they need to conform to Fannie/Freddie Mortgage Guidelines. Here are the basic Conventional Credit Score and Debt To Income Ratio Requirements:
- The minimum credit score to qualify for conventional loans is 620.
- Maximum debt to income ratio requirements to get an approve/eligible per Automated Underwriting System is 50% DTI for Fannie Mae
- Maximum debt to income ratio requirements to get an approve/eligible per Automated Underwriting System is 50% DTI for Freddie Mac
However, both Fannie Mae and Freddie Mac only render an AUS approval on debt to income ratio up to a 50% DTI on higher credit score borrowers. Otherwise, the DTI limit caps at 45%. Most private mortgage insurance companies will only insure conventional loans for borrowers with 50% DTI if they have 680 or higher credit scores.
Mortgage Approval For Borrowers With Lower Credit Scores
Homebuyers with lower credit scores can qualify for FHA loans as long as they get an approve/eligible per Automated Underwriting System (AUS). Homebuyers with 500 to 579 credit scores can qualify for FHA Loans with a 10% down payment. Need to get an approve/eligible per Automated Underwriting System. Compensating Factors are required. Need to have been timely on all payments for the past 12 months.
Seller Concessions and Lender Credit For Closing Costs
Homebuyers can pay closing costs with sellers’ concessions and/or lender credit. Lender Credit is when the lender will cover part or all of the closing cost in lieu of a higher mortgage interest rate. Sellers can pay for buyers closing costs, taxes, insurance, and mortgage insurance premium. The maximum seller contribution is a 6% seller contribution on FHA loans.
Mortgage Guidelines For Gift Funds For Down Payment
The down payment on a home purchase can be gifted on FHA Loans. The donor of a down payment should be a family member or good friend who has known the borrower for at least 5 years. The earnest money that can be used for the down payment can be used towards the home purchase. Homebuyers and mortgage borrowers with any questions can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. We are available 7 days a week, on evenings, weekends, and holidays.
May 27, 2022 - 8 min read