HUD Manual Underwriting DTI Guidelines And Compensating Factors

This ARTICLE On HUD Manual Underwriting DTI Guidelines And Compensating Factors Was PUBLISHED On July 24th, 2020

HUD Manual Underwriting DTI Guidelines
Gustan Cho Associates

HUD Manual Underwriting DTI Guidelines is dependent on the number of compensating factors. FHA and VA loans are the only two loan programs that allow manual underwriting. On approve/eligible per automated underwriting system findings, borrowers can have a maximum 46.9% front end and 56.9% back end DTI. However, with manual underwriting, the debt to income ratio caps is lower. Lenders consider the level of a manual underwrite riskier than a file that has been automated underwriting system approved.

Below is the chart on the maximum HUD Manual Underwriting DTI Guidelines. Again, the maximum front end and back end debt to income ratio caps depend on the number of compensating factors the borrower has.

What are the compensation factors for borrowers with high debt

Compensating factors are positive factors viewed by lenders that offset the risk of manual underwriting to lenders.

  • There are only certain things that are considered compensating factors which we will discuss in this blog
  • The more compensating factors a borrower has, the less risk the lender has
  • Therefore, the more compensating factors, the higher the debt to income ratio is allowed
  • In general, manual underwriting is considered riskier than files that have gotten an approve/eligible per automated underwriting system
  • Gustan Cho Associates are experts in manual underwriting on FHA and VA loans
  • Mortgage rates on manual underwriting are slightly higher
  • This is due to loan level pricing adjustments on manual underwriting. Loan level pricing adjustments are also referred to as LLPAs
  • LLPAs are pricing hits to mortgage rates due to the level of risk sustained by the mortgage lender

In this article, we will discuss and cover HUD Manual Underwriting DTI Guidelines And Compensating Factors.

HUD Manual Underwriting DTI Guidelines: What Is Manual Underwriting

All mortgage loan applications need to be submitted to Fannie Mae’s and/or Freddie Mac’s automated underwriting system.

  • The automated underwriting system is also referred to as the AUS
  • The AUS is an intricate sophisticated automated underwriting system that analyzes the borrowers’ credit report, credit scores, credit tradelines, income, liabilities, assets, derogatory credit tradelines, public records, and all other income/asset/liability data in a matter of seconds and renders automated findings

There are three automated findings from the automated underwriting system:

  • Approve/eligible which means the borrower has an automated underwriting system approval
  • Refer/eligible which means the automated underwriting system cannot render an approval but it can be manually underwritten by a human mortgage underwriter
  • Refer/With Caution which means the borrowers do not qualify

Most manual underwriting is due to refer/eligible per AUS findings. However, there are instances where a mortgage underwriter will downgrade an approve/eligible per AUS to a manual underwrite.

What Are Compensating Factors

What Are Compensating Factors

Compensating Factors are positive factors a borrower has. By having compensating factors, lenders believe the lender’s risk levels are lessened. Therefore, lenders allow high debt to income ratio caps for borrowers with compensating factors.

The following positive factors are considered compensating factors by lenders when it comes to manual underwriting:

  • The borrower has a second job such as a full-time, part-time, or another job with documented income but has not been seasoned for at least two years and not used as qualified income is considered a compensating factor
  • The borrower has a habit of saving money and having three or more months in reserves is considered compensating factors
  • The borrower putting more down payment than the minimum down payment required such as a 10% versus a 3.5% down payment
  • Low payment shock of 5% or less from the rent they were paying to the new housing payment is considered compensating factor
  • Longevity on the job with a history of consistent raises is considered a compensating factor
  • Residual income

Mortgage underwriters will look for compensating factors when underwriting manual underwrites to offset the risk level.

HUD Manual Underwriting DTI Guidelines Versus Compensating Factors

The lower the borrowers’ credit scores, the higher the risk level the borrower is to lenders. The lowest credit score required for a 3.5% down payment FHA home purchase loan is 580 FICO. Borrowers with under 580 credit scores down to a 500 FICO can qualify for FHA loans with a 10% versus a 3.5% down payment. Borrowers with credit scores between 500 to 579 FICO, the maximum debt to income ratios allowed on FHA loans is 31% front end and 43% back end no matter how many compensating factors they have.

Borrowers with credit scores over 580 FICO, the following are the HUD Manual Underwriting DTI Guidelines:

  • 31% front end and 43% back end debt to income ratios with zero compensating factors
  • 37% front end and 47% back end debt to income ratios with one compensating factors
  • 40% front end and 50% back end debt to income ratios with one compensating factors

The above debt to income ratios is just a guide and not set in stone. Mortgage underwriters can exceed the above maximum debt to income ratios on a case by case scenario on manual underwrites.

Gustan Cho Associates are experts in FHA and VA manual underwriting. To qualify with a lender with no overlays on government and conventional loans, please contact us at GCA Mortgage Group at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates are available 7 days a week, evenings, weekends, and holidays.

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