HUD Manual Underwriting Guidelines For FHA Loans

This BLOG On HUD Manual Underwriting Guidelines For FHA Loans Was PUBLISHED On July 15th, 2020

HUD Manual Underwriting Guidelines
Gustan Cho Associates Mortgage Group

Manual Underwriting is available on FHA and VA Home Loans. It is not available on conforming loans.

  • Manual Underwriting is when Automated Underwriting System (AUS) cannot render an approve/eligible
  • If AUS renders a refer/eligible per AUS, the file can be manually underwritten
  • It needs to be manually underwritten by a human underwriter because Automated Underwriting System cannot render an approve/eligible with the data it was provided
  • All VA and FHA Home Loans during Chapter 13 Bankruptcy repayment plan needs to be manually underwritten
  • Any VA and/or FHA borrowers who recently gotten a Chapter 13 Bankruptcy discharge that has not been seasoned for at least two years need to be manually underwritten
  • HUD, the parent of FHA, has strict HUD Manual Underwriting Guidelines for FHA mortgage underwriters to follow

In this article, we will discuss and cover HUD Manual Underwriting Guidelines For FHA Loans.

HUD Manual Underwriting Guidelines On Credit History

HUD Manual Underwriting Guidelines on how mortgage underwriters should review borrowers credit history are as follows:

  • Mortgage Underwriters needs to analyze and review borrowers overall credit report and payment history in the following order
  • Review prior housing expenses 
  • Review and analyze not just housing expenses but also utilities 
  • Review borrowers monthly installment payments and debts
  • Revolving accounts

Importance Of Timely Payments In The Past 12 Months

Borrowers need to be timely on all monthly payments, especially housing payments in the past 12 months.

  • No late payments on revolving debt in the past 12 months
  • Borrowers cannot have any major derogatory payments on credit in the past 12 month
  • Per HUD Manual Underwriting Guidelines, major derogatory means as any late payments that is one times 90 days late and/or no more than three times 60 days late reporting on the credit report
  • No more than two times 30 day late payments in housing payments in the past 24 months (2 years)
  • There cannot be any non-medical collections in the past 12 months

If the above checklist is not met, it can only be reviewed and signed off by a DE Mortgage Underwriter with documentation that the above checklist cannot be met is due to extenuating circumstances.

Credit Approval HUD Manual Underwriting Guidelines

What are the guidelines for manually guaranteeing emissions in HUDs?

Verification Of Rent is required per HUD Manual Underwriting Guidelines.

  • Payment Shock of 5% or less is considered a great positive compensating factor
  • Verification Of Rent is only valid if borrowers can provide 12 months canceled checks and/or 12 months bank statements paid on time to landlord
  • If the renter has been renting from a registered property management company, then VOR Form completed, signed, dated by property manager can be used in lieu of 12 months canceled checks and/or 12 months bank statements
  • If borrowers were living rent-free with a family member and/or relative, need to provide a letter from the owner of the property where borrowers have been living rent-free
  • The borrower can provide a letter of explanation that he or she was living rent-free in lieu of paying utilities and/or saving for the down payment on a home purchase

Borrowers with prior Loan Modification, history of mortgage payment must utilize the time period in the modification to determine housing late payments.

How Underwriters View Collections And Charged Off Accounts

Outstanding collections and charged-off accounts do not have to be paid off to qualify for FHA Loans.

  • However, outstanding collections and charge off accounts of any loans and/or debts in the name of borrowers need to be fully documented with a letter of explanation and supporting documentation
  • It needs to be consistent with the file for each credit tradelines
  • Credit Disputes on accounts that are in collections, charged-off accounts, or have late payments in the past 12 months also needs to be documented with a letter of explanation and supporting documentation with the exception of medical collection accounts
  • Non-medical collection accounts with an aggregate total balance of $2,000 or greater, underwriters must take 5.0% of the outstanding balance and use it as a monthly debt of borrowers when calculating debt to income ratios

Charge off accounts is excluding from the 5% rule.

Wait Period After Housing Event And Bankruptcy

FHA Case Numbers cannot be assigned without the mandatory wait periods after housing event and/or bankruptcy:

  • Three year wait period after foreclosure, deed in lieu of foreclosure, short sale from the date the property has been transferred
  • Two year wait period after the discharged date of Chapter 7 Bankruptcy
  • Borrowers in a current repayment plan under Chapter 13 Bankruptcy can qualify for FHA Loan after 12 months of timely payments to their creditors with Trustee Approval
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for FHA Loans

Chapter 13 Bankruptcy discharge that has not been seasoned for 24 months needs to be manually underwritten by DE Mortgage Underwriter.

Manual Underwriting of the Borrower Single Family Housing Policy Handbook 4000.1

Non‐Traditional Credit HUD Manual Underwriting Guidelines

Under HUD Manual Underwriting Guidelines, three credit tradelines need to be provided by borrowers to determine they are creditworthy.

Primary Non-Traditional Credit Tradelines includes the following:

  • 12 months of rental history
  • Telephone
  • Utilities

Secondary Non-Traditional Credit Tradelines includes the following:

  • Insurance
  • Children’s care
  • Tuition
  • Store credit cards
  • Rent to own creditors
  • Medical bills and creditors
  • Automotive Leases
  • Personal Loan Payments
  • Saving deposits made consistently for the past 12 months

Employment And Work History Guidelines

The mortgage loan application needs to reflect the following:

  • Two years of employment history
  • School history can be used in lieu of work history
  • With employment gaps of six months or greater, the borrower needs to be in a current full-time job for at least six or more months and require a letter of explanation as of the reason for a gap in employment
  • Need a two-year history of employment prior to job gap

Reserve Requirements And Guidelines

What are the reserve requirements and guidelines?

Reserves cannot be gifted. It needs to be borrowers own funds. One month’s reserves are required on manual underwriting which consists of one month of the following:

  • Principal
  • Interest
  • Taxes
  • Insurance
  • HOA if applicable
  • Flood Insurance if applicable

Reserves On Multiple Unit Properties:

  • One to two-unit properties require a minimum of one month’s PITI in reserves
  • Three to four-unit properties require a minimum of 3 months PITI in reserves

HUD Manual Underwriting Guidelines With Debt to Income Ratios

Borrowers will get an approve/eligible with 46/9% front end and 56.9% back end with Automated Underwriting System.

However, per HUD Manual Underwriting Guidelines, debt to income ratio requirements are the following:

  • With No Scores, ‐DTI may not exceed 31% front end and 43% DTI back end
  • 500‐579 credit scores ‐Debt To Income Ratios cannot exceed 31/43
  • 580 and above maximum debt to income ratios are 31% front end and 43% back end without compensating factors

580 and above maximum DTI is 37/47 with one compensating factor and needs to be one of the following:

  • Verified and documented cash reserves
  • Less than 5% in payment shockMinimal increase in housing expense
  • or Residual income

580 and above debt to income ratio is 40/40 with no discretionary debt:

  • 580 and above maximum debt to income ratio is 40% front end and 50% back end with two compensating factors:
  • Verified and documented cash reserves
  • Payment shock of less than 5% or Minimal increase in housing expense
  • Significant additional income such as part-time income borrower had one-year seasoning but not used as qualified and effective income
  • and/or borrowers having residual income

Down Payment Requirements On FHA Purchase Loans

If the home buyer has credit scores of 580 or higher, FHA requires a 3.5% down payment. If the buyer has credit scores under 580, FHA requires a 10% down payment.

Borrowers who need to qualify for FHA Loans with a national direct lender with no overlays on government and conventional loans, please contact Gustan Cho Associates Mortgage Group at 261-716-8151 or text us for a faster response Or email us at gcho@gustancho.com. We have zero overlays on FHA Loans and are available 7 days a week to take your mortgage inquiries.

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