FHA Manual Underwriting Mortgage Guidelines

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This blog will discuss and cover FHA manual underwriting mortgage guidelines and requirements. We will explain the key points of the FHA manual underwriting mortgage lending guidelines and the importance of compensating factors. FHA and VA loans are the only two home mortgage programs that allow manual underwrite.

FHA manual underwriting mortgage guidelines require timely payments on all debts from the borrower for the past twenty-four months. Verification of rent is required per FHA manual underwriting mortgage guidelines. In the following paragraphs, we will cover FHA manual underwriting mortgage guidelines on FHA loans.

What Is Manual Underwriting?

Manual underwriting is when the automated underwriting system (AUS) cannot render an approve/eligible and renders a refer/eligible. Refer/eligible findings is when the automated underwriting system (AUS) finds the borrower eligible but cannot determine a solid automated approval. Refer/eligible means the file is referred to a human mortgage underwriter for full in-depth manual underwriting.

Mortgage underwriters have a lot of underwriter discretion on FHA manual underwriting mortgage guidelines. Underwriters can go above the recommended debt-to-income ratio threshold per FHA manual underwriting mortgage guidelines if they see the borrower has strong compensating factors and residual income.

Is VA and FHA Manual Underwriting Mortgage Guidelines The Same?

There are general manual underwriting guidelines on both FHA and VA loans. FHA and VA manual underwriting guidelines are similar to credit and debt-to-income ratio guidelines.

However, there are no dead-set-in-stone requirements with FHA Manual Underwriting Mortgage Guidelines. Mortgage underwriters have a great deal of discretion on manual underwriting files. Manual Underwriting is when a mortgage loan application cannot get approve/eligible per Automated Underwriting System.

Automated Underwriting System Referring File To Manual Underwriting

FHA and VA loans are the only mortgage programs allowing manual underwriting. Conventional loans with refer/eligible AUS findings cannot be downgraded to a manual underwrite.  A mortgage loan applicant can get their file downgraded to an FHA or VA manual underwrite if the Automated Underwriting System cannot approve/eligible but yields a referred/eligible per Automated Findings.

What Does Refer/Eligible Per Automated Underwriting System Mean?

Referred means that the automated system cannot issue an automated approval with the information. Refer/eligible findings are when the data entered in the automated underwriting system cannot render an approve/eligible AUS approval. Eligible means that the mortgage loan application is eligible for mortgage loan approval. Refer means that the file needs to be downgraded to a manual underwrite and referred to a human mortgage underwriter. This article will cover and discuss FHA manual underwriting mortgage guidelines. Speak With Our Loan Officer for Mortgage Loans

The Importance of Timely Payments in the Past 24 Months For FHA Manual Underwriting Mortgage Guidelines

Manual Underwriting means that the mortgage file cannot be approved by the automated underwriting system (AUS). However, the file can be assigned to a human mortgage underwriter and has to be manually underwritten. Not all lenders do manual underwriting. However, Gustan Cho Associates are experts in manual underwriting.

Timely payments in the past 24 months are key on all manual underwrites. The mortgage underwriter will thoroughly review the whole mortgage loan application. The underwriter will look for derogatory credit information and what the borrower has done to rebuild and re-establish credit after the period of bad credit, bankruptcy, or a housing event, if applicable.

• Reserves
• Low payment shock through verification of rent
• Longevity in the job, larger down payment
• Additional income not used as qualified income
• Part-time income borrower has for at least a year but is not used as qualified income.
• Other positive factors that show the strength of the mortgage loan borrower
• Lenders view lower credit score borrowers as higher risk.

Mortgage underwriters will analyze the credit risk surrounding derogatory credit items. The mortgage underwriter will look for compensating factors that are positive. Compensating factors are positive factors from borrowers that offset the layered risk for mortgage lenders.

Compensating factors are important for borrowers with higher debt-to-income ratios on manual underwriting. Examples of compensating factors are: Under 620 credit scores. HUD manual underwriting mortgage guidelines state that the mortgage underwriter has discretion in assessing the borrower’s risk when deciding whether to approve a mortgage loan.

UPDATED FHA Manual Underwriting Mortgage Guidelines on FHA Loans

There are no specific requirements with the most recently updated FHA Manual Underwriting Mortgage Guidelines. Many deciding factors rely on mortgage underwriter discretion. One of the most important factors most mortgage underwriters require is rental verification.

Compensating Factors on payment shock is when less than 5% payment shock or $100 increase from the rental expense to new housing payment, whichever is less. Rental verification is only valid if the renter can provide 12 months of canceled checks where he or she has paid their rental payments with a bank check.

Low Payment Shock is Considered a Strong Compensating Factor

In place of 12 months of canceled rental payment checks, the renter can provide 12 months’ bank statements if they have paid them online. Cash rental payment does not count as verification of rent. Verification of rent is not valid with cash payments to landlords. Just a paid receipt cannot be used for verification of rent. Rental payments need to be paid with a check or bank wire.

A paid receipt from the landlord is invalid unless the renter has proof of payment via canceled checks or bank statements.

If the renter has leased their apartment or home from a registered property management company, then a verification of rent form provided by the lender to the property management company can be used instead of canceled checks or bank statements. All rental payments in the past 12 months must have been on time, and no 30-day late payments on their monthly rent are allowed.

What is the Minimum Credit Score for a Manual Underwrite?

Mortgage lenders like myself have no FHA mortgage lender overlays.  FHA Manual underwriting mortgage loans with credit scores as low as 580 credit scores for a 3.5% down payment home purchase FHA loan.

Manual underwriting with an under 580 credit score and down to a 500 FICO can be done, but the borrower needs a 10% down payment if they have an under-580 FICO per HUD Agency Mortgage Guidelines. However, most lenders have overlays on credit scores with manual underwriting loans where they want a minimum credit score of at least 640. Qualify for Mortgage Loans with low credit scores, click here

What is the DTI for Manual Underwrite on FHA Loans?

If you have zero compensating factor, you can go up to 31% front-end and 43% back-end debt-to-income ratio. However, manual underwriters will look for strong compensating factors when underwriting a manual underwrite. If you have one compensating factor, you can go up to 37% front-end and 47% back-end debt-to-income ratio. With two compensating factors, you can go up to 40% front-end and 50% back-end debt-to-income ratio.

Manual Underwrites are becoming very popular. There are instances where an approve/eligible per AUS FINDINGS loan applicant will get downgraded to a manual underwrite, such as in cases with credit disputes. All manual underwriting requires verification of rent.

Borrowers looking for an FHA mortgage lender with no Lender Overlays specializing in manual underwriting, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays to take calls and answer any questions.

What If I Do Not Have Verification of Rent and Living Rent-Free Family

Gustan Cho Associates will exempt verification of rent if the borrower is living rent-free with family to save money for the down payment and closing costs on a home purchase. Borrowers with higher debt-to-income ratios need compensating factors. The maximum debt-to-income ratio caps on manual underwrites on FHA loans are 40% front-end and 50% back-end debt-to-income ratios. The above bullet points below apply to all manually underwritten FHA Loans.

HUD Mortgagee Letter 2014-02 RESERVES REQUIRED on Manually Underwritten Loans.

1-month reserves are required on all 1-2 unit properties on manually underwritten FHA Loans. Three months reserves are required on all 3-4 unit properties with manually underwritten FHA loans. Automated Approved FHA Loans debt to income ratios are 46.9% DTI front end and 56.9% DTI back end on borrowers with credit scores 620 and higher.

For borrowers with credit scores under 620, maximum DTI requirements are capped at 43% DTI for an automated underwriting system approval. Below are the manually underwritten debt-to-income ratio requirements PER 2022 HUD GUIDELINES ON MANUAL UNDERWRITING. For borrowers with credit scores under 580 or who need to be underwritten with non-traditional credit, the maximum debt-to-income ratio required is 31% front end and 43% DTI back end. Click here to fill up with your requirements and we will back with your loan review

Number of Compensating Factors Determine Debt-To-Income Ratio Cap

For borrowers with at least a 580+ credit score with NO compensating factors, the maximum front-end debt-to-income ratio is 31% DTI and 43% DTI back end. For borrowers with at least a 580 credit score and ONE compensating factor, the maximum front-end debt-to-income ratio is 37% DTI, and the maximum back-end debt-to-income ratio is 47% DTI.

For borrowers with at least a 580+ credit score with TWO compensating factors, the maximum front debt to income ratio is 40% DTI, and the full back-end DTI is 50% DTI. For borrowers with at least a 580+ FICO credit score with NO discretionary debt, the maximum front-end debt-to-income ratio is capped at 40% DTI, and the maximum back-end is capped at 40% DTI.

FHA Manual Underwriting Mortgage Guidelines on Compensating Factors

Acceptable Compensating Factors per HUD GUIDELINES are limited to the following:

• Three months of reserves for 1-2 unit properties
• Six months reserves for 3-4 unit properties
• The new total monthly mortgage payment is not more than $100 or 5% higher than the previous total monthly housing payment, whichever is less.
• There is documented 12-monthly housing payment history with no more than one late payment in the past 12 months.
• Cash-out refinance transactions cannot have any late payments in the past 12 months.
• Residual income. (See HUD mortgagee letter 2014-02 for details)
• Verified and documented significant additional income not considered effective income

FHA Manual Underwriting Mortgage Guidelines on Timely Payments

All manual underwriting requires timely payments in the past 12 months. Borrowers who need a lender licensed in most of the 50 states with no overlays on FHA loans and can do manual underwriting on FHA and VA Loans, please get in touch with us at Gustan Cho Associates at 800-900-8569. Or text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.

FAQ on FHA Manual Underwriting Mortgage Guidelines

1. What is manual underwriting? Manual underwriting occurs when the Automated Underwriting System (AUS) refers a mortgage application for a more detailed review by a human underwriter.

This can happen if the AUS finds the borrower potentially eligible but cannot confirm an automatic approval. Manual underwriting is necessary for cases where borrowers may have complex financial situations, such as a history of bankruptcy or inconsistent income.

2. Are FHA and VA manual underwriting guidelines the same? While FHA and VA manual underwriting guidelines share similarities, particularly in assessing credit and debt-to-income ratios, they are not identical. Both allow for a degree of underwriter discretion, but specific requirements can vary between the two types of loans.

3. What does “Refer/Eligible” mean in automated underwriting? “Refer/Eligible” in the context of automated underwriting means that the automated system has determined the borrower could be eligible for a loan but requires a manual review by an underwriter to verify certain elements of the application. It indicates that the loan is not automatically approved due to specific concerns or missing information but is not outright denied.

4. What is the importance of timely payments for FHA manual underwriting in the past 24 months? For FHA manual underwriting, it is crucial to demonstrate a history of timely payments on all debts for the past 24 months. This history helps show the borrower’s reliability in managing debt and making regular payments, which is a significant factor in the approval process for manual underwriting.

5. What is considered a strong compensating factor in FHA manual underwriting? FHA manual underwriting considers minimal housing payment increase, cash reserves, and stable employment history as strong compensating factors that mitigate the risk of lower credit scores or higher debt-to-income ratios.

6. What is the minimum credit score for a manual underwrite? The minimum credit score typically required for an FHA loan under manual underwriting is 580 for a 3.5% down payment. However, borrowers with credit scores between 500 and 579 may still qualify for an FHA loan but must make a 10% down payment.

7. What are the DTI limits for manual underwriting on FHA loans? Debt-to-income (DTI) limits for manual underwriting vary based on the presence of compensating factors. Without compensating factors, the maximum front-end DTI is usually limited to 31% and the back-end DTI to 43%. With compensating factors, these limits can be extended up to 37% front-end and 47% back-end with one compensating factor and 40% front-end and 50% back-end with two compensating factors.

8. What if I don’t have rent verification and live rent-free with my family? FHA manual underwriting guidelines may exempt the verification of rent if the borrower is living rent-free with family. This situation often allows borrowers to save money for a down payment and closing costs, which can benefit the loan approval process.

9. What reserves are required on manually underwritten FHA loans? Reserves required on manually underwritten FHA loans typically include one month of reserves for 1-2 unit properties and three months for 3-4 unit properties. Reserves are funds that the borrower must have in addition to the down payment and closing costs to cover potential future mortgage payments.

These FAQs provide a broad overview of key aspects of FHA manual underwriting mortgage guidelines, offering insights into the flexibility and detailed review involved in this loan approval process. Click here to talk to our expert to get answer about your questions

This blog about the FHA Manual Underwriting Mortgage Guidelines was updated on April 18th, 2024.

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