HUD Manual Underwriting Requirements On FHA Home Loans


This BLOG On HUD Manual Underwriting Requirements On FHA Home Loans Was PUBLISHED On April 11th, 2019

HUD Manual Underwriting Requirements
Gustan Cho Associates


With the recent news that HUD will be tightening credit standards for borrowers under 640 FICO, manual underwriting will be becoming more popular.

  • Borrowers with under 640 FICO with bad credit will find it more difficult in getting an approve/eligible per automated underwriting system (AUS)
  • Borrowers who cannot get an approve/eligible per AUS and gets a refer/eligible can have their FHA Loans downgraded to manual underwriting
  • HUD Manual Underwriting Requirements is the same as an approve/eligible but the debt to income ratio caps are reduced
  • HUD Manual Underwriting Requirements maximum debt to income ratio caps is set at 40/50 DTI with two compensating factors
  • With no compensating factors, HUD Manual Underwriting Requirements on DTI is 31%/43%, with one compensating factor HUD Manual Underwriting Requirements is capped at 37%/47% DTI

In this blog, we will discuss HUD Manual Underwriting Requirements.

Reason For Manual Underwriting

There are times the automated underwriting system does not render an approve/eligible and renders a refer/eligible per AUS. Refer/eligible means that the automated underwriting system cannot render an automated decision and refers it to a human mortgage underwriter. HUD has recently changed it alogrithms on automated underwriting systems where they made it more strict for borrowers with under 640 FICO to get an automated underwriting system approval. Alex Carlucci, a senior vice president at Gustan Cho Associates, does the largest amount of manual underwriting at Gustan Cho Associates Mortgage Group. This is what Alex Carlucci stated:

So what is the AUS System? It’s the Automated Underwriting System (the computer system) that is used to initially look at credit and ratios, and job history (etc) to see if the chances of approval are high. FHA decided in March of 2019 that the Automated approvals for loans with low credit scores and high debt needed to be changed, and these loans really needed to be underwritten by a REAL person, not a machine. FHA doesn’t make loans, they provide Mortgage Insurance (PMI) for the lender in the event of default. Because they think these more complicated loans need to have some more “common sense” underwriting – they are making a change. The documentation required for approval for Manually Underwritten FHA Mortgage Loans is pretty much the same it always has been, and it varies based upon the Debt to Income Ratios.  In our experience, getting an AUS Approval  Between 600 and 620 is likely to be a Manually underwritten file, and anything under 640 credit score doesn’t qualify for grants for first time home buyers. Credit score of 580 and Above, With a Debt to Income Ratio of 31/43 there are No Compensating Factors Required.  Energy Efficient Homes (Must be Certified an show as such on the Appraisal) may have stretch ratios of 33/45. Credit score of 580 and Above, With a 37/47 DTI, we will need ONE of the following:  verified and documented cash Reserves; minimal increase in housing payment; or residual income. Credit score of 580 and Above, With a Debt to Income Ratio of 40/40 we can have no discretionary debt. Credit score of 580 and Above, With a Debt to Income Ratio of 40/50 we will need TWO of the following verified and documented cash Reserves; minimal increase in housing payment; significant additional income not reflected in Effective Income; and/or residual income.

Importance Of Compensating Factors For FHA Loans

What is the importance of compensating factors for FHA loans

Borrowers with higher debt to income ratios will need compensating factors.

  • The maximum debt to income ratios allowed on manual underwriting is 40% front end and 50% back end with two compensating factors
  • With automated underwriting system approvals, borrowers can get AUS Approval with a 46.9% front end and 56.9% back end debt to income ratios
  • Compensating factors are positive strength borrower has
  • One month of reserves is required on manual underwriting
  • Reserves is one month of principal, interest, taxes, insurance (PITI)
  • Three months of reserves on manual underwriting is considered compensating factors
  • Low payment shock of 5% or less and/or $100 is also considered compensating factors
  • Additional income such as part-time income with at least one year’s of seasoning is another comp factor
  • Residual income is another comp factor

Residual income is left over income after borrowers pay all of their outstanding monthly debts including proposed monthly PITI.

FHA Loans In 2019

Manual Underwriting is headed to become the norm for a borrower with credit scores under 640  FICO in 2019. Borrowers with under 640 FICO who need a direct lender with no overlays on FHA Loans and needing a manual underwrite, please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at Not all lenders can do manual underwriting. A large percentage of our business is manual underwrites. We are available 7 days a week, evenings, weekends, and holidays.

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