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HUD Manual Underwriting Mortgage Process And Underwriting Guidelines

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This BLOG On HUD Manual Underwriting Mortgage Process And Underwriting Guidelines Was PUBLISHED On May 7th, 2019

On May 18, 2019, Housing and Urban Development (HUD) changed its automated underwriting system parameters and HUD Manual Underwriting Mortgage Process.

  • FHA mortgages with higher debt to income ratios and lower credit scores are now not receiving approved eligible AUS findings as often
  • Since trends in the data show these loans to be higher risk, the algorithm for the automated underwriting system is now requiring more manual underwriting
  • Do not let this scare you
  • Gustan Cho Associates Associates at Loan Cabin are experts
  • In fact, this is our specialty
  • Majority of lenders have extra lender overlays that prevent them from successfully manually underwriting loans

In this blog, we will detail the changes announced the last month and go over some basics of HUD Manual Underwriting Mortgage Process.

Reasons For Updating HUD Manual Underwriting Mortgage Process

Effective immediately, it will be more difficult to get an automated underwriting system approval if your credit scores are under 640 on FHA Loans. HUD Manual Underwriting Mortgage Process Updates is taking effect immediately.

  • While the exact reasons for the change or unclear, it seems to support evidence that higher debt to income ratio mortgages is not performing like they once were
  • Of course, lower credit score equals higher risk, the data of default it FHA mortgages are behind the change
  • This new rule on HUD Manual Underwriting Mortgage Process only affects mortgages with credit score is below 640
  • Please see HUD’s webpage for more information on FHA TOTAL SCORECARD (technology open to approved lenders)
  • FHA Total Scorecard is analyzed through DU or LP and is not an AUS itself
  • The TOTAL SCORECARD will have either an “accept” or “refer” classification
  • If you get an “accept” your file indicates the FHA will insure your loan without a manual underwriting review

HUD Manual Underwriting Mortgage Process Updates Versus AUS 

However, after HUD tweaked the algorithm on March 18th, 2019. More borrowers will receive a “Refer: classification which DOES require a manual underwriting certification by an FHA Direct Endorsement (DE) Underwriter.

What Are Some Basics To Manual Underwriting For FHA Mortgages?

FHA manual underwriting has very cut-and-dry debt-to-income requirements and payment history requirements.

  • If your loan requires a manual underwrite, your payment history will be combed through for the past 24 months
  • You may not have any housing or installment late payments within the past 12 months, and no more than two 30-day late payments within the past 24 months
  • Meaning between months13 and 24, you are allowed to have two 30-day late payments
  • FHA manual underwriting will also require no more than 260-day late payments on any revolving debt, and you may not be more than 90 days late during the past 12months

See chart below:

A quick side note for mortgages that are modified with late payments.

  • The mortgage company may ignore all late payments prior to the modification
  • During a manual underwrite, the underwriter is only concerned with payment history since the loan was modified

You must be able to document at least 12 on-time payments to your modified mortgage before eligible to apply for a new FHA mortgage loan.

DEBT-TO-INCOME Requirements

For credit scores below 580 or NO CREDIT SCORE reporting, the max debt to income requirements is 31% / 43%. Even with compensating factors you cannot go over these thresholds.

  • For credit scores above 580, debt to income ratio requirements can vary
  • With more compensating factors, you may go to a higher debt to income ratio threshold
  • If you do not have any compensating factors, your debt to income ratio requirement is maxed at 31% / 43%
  • If you have ONE compensation factor you may go up to 37% / 47%
  • With TWO compensation factor, you may go up to 40% /50%

See chart below for more specifics.

Examples Of Compensating Factors:

Verified and documented cash Reserves (1-2 unit home requires reserves of 3 months PITI, 3-4 unit homes require reserves of 6 months PITI)

  • Minimal increase in housing payment
  • Residual income
  • Longevity on job

Manual Underwriting Loans For Clients Without Credit Scores

Not having a credit score can be frustrating when looking to obtain a mortgage.

  • Luckily, HUD guidelines do allow borrowers to receive FHA financing without a credit score
  • You only need 3.5% down payment
  • You do need to use NON-TRADITIONAL CREDIT References to build tradelines
  • You must verify housing expenses such as rental payments or utility company bills (phone, gas, electric, water, cable, internet) for at least the past 12 months
  • You must also verify non-housing expenses
  • You must verify at least two forms of non-housing bills
  • Examples could be; insurance premiums, not payroll deducted, School tuition or child care expenses, rent-to-own payments on furniture or appliances, medical payments not covered by insurance, automobile payments

Your payment history on these bills will allow the underwriter to make an educated decision on your loan.

Please see our FHA Mortgage Without A CreditScore Blog for more information.

Common Mistakes With Manual Underwriting

The mistake most borrowers make when they require a manual underwrite is selecting the wrong lender.

  • It is important to use a lender who specializes in manual underwriting
  • Majority of Wonders have LENDER OVERLAYS that prevent them from successfully closing mortgages that require a manual underwrite
  • Gustan Cho Associates at Loan Cabin does not have ANY LENDER OVERLAYS for FHA mortgages
  • Since we do so many manual underwritten loans, we know what to ask for upfront, saving you time and headache
  • It is important to have strong letters of explanation for any derogatory items on your credit report, decreases and income, and non-sufficient funds on bank statements
  • Adding these letters of explanation upfront will save the underwriter from asking additional questions
  • It is important to be as thorough as possible when sourcing large deposits and or gift funds
  • All pages of the bank statements must be present
  • Another common mistake happens when completing the verification of rent

If you rent from a private landlord, we will need 12 months canceled rent checks to verify your on-time payments.

For more information on the AUS change on FHA mortgages, see HUD’sBulletin from March 14th, 219. You can reach out directly to MikeGracz on 630-659-7644 or text us for faster response. Or email us at mgracz@gustancho.com. Mike is an expert in FHA mortgage guidelines. He is available 7 days a week to answer any questions you may have. Gustan Cho Associates are the leaders in manual underwriting, please call us for more information and a free rate quote.

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