Manual Downgrade From AUS Approval on FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will discuss and cover the manual downgrade from AUS approval on FHA loans. Manual Downgrade From AUS Approval is sometimes required by lenders who think the FHA loan is too marginal. For example, if a borrower with a credit score of 580 and higher debt-to-income ratios gets an approve/eligible per automated underwriting system, the lender may want to do a manual downgrade from AUS Approval. This is often the case with a lender who is not aggressive and on the conservative side with lender overlays. Gustan Cho Associates will not do a manual downgrade from AUS Approval on FHA loans.

No Overlays Mortgage Lenders

Many lenders who have lender overlays often do a manual downgrade from AUS approval. There are other instances where a manual downgrade from AUS approval is necessary. Many loan officers rather downgrade the file to a manual underwrite instead of retracting credit disputes during the mortgage process. Retracting a credit dispute will drop the borrower’s credit scores. Borrowers cannot have credit disputes during the mortgage process. However, you do not have to retract credit disputes if you downgrade it to a manual underwriting file. In this article, we will discuss and cover the manual downgrade from AUS approval on FHA loans.

Understanding The Automated Underwriting System During The Mortgage Process

Borrowers should understand how the mortgage process works. Many borrowers do not know that a lender can do a manual downgrade from AUS approval on FHA and VA loans. The first stage of the mortgage process is to get pre-approved. A pre-approval should not be issued unless the borrower gets an approve/eligible per an automated underwriting system. Borrowers with a referred/eligible per AUS may qualify for manual underwriting on FHA and VA loans. FHA and VA loans are the only two loan programs that allow manual underwriting. USDA and Conventional loans do not allow manual underwriting. All manual underwriting guidelines apply.

How Does AUS Findings Render Its Automated Findings Decision?

Once the loan officer pulls a tri-merger credit report and takes the borrower’s mortgage loan application, the file is submitted to the automated underwriting system. The automated underwriting system will render three decisions. The AUS is a sophisticated computer system that will analyze a borrower’s credit and financial information and render the eligibility of the borrower in a matter of seconds. The automated underwriting system is a highly technologically advanced system that can trigger any reasons for an automated approval, denial, or referred/eligible status of any borrowers in any loan program.

What Are AUS Finding?

The automated underwriting system approval determines whether an applicant is approved or not by issuing an AUS Findings Report. The report states whether the applicant is approved eligible or not. If approved eligible, the Findings Report will indicate what documents are required to verify the application data

What Are The 3 C’s That Mortgage Underwriters Evaluate?

What Does The Automated Underwriting System Look For?

Automated underwriting systems (AUS) analyze a client’s financial information (such as credit score and income) in addition to the overall value of the property they are looking to purchase (usually determined by an appraiser).

Differences Between AUS Approval Versus Manual Underwriting

The main difference if we need to manually underwrite the loan is proof of on-time rental or housing payments. This can be accomplished with verification of rent if you’re paying a management company or 12 canceled checks showing payment to your landlord. There is more strict debt-to-income requirements when manually underwriting FHA loans with 500 FICO.

There is three automated underwriting system finding on every mortgage loan application. Here are the automated underwriting system findings:

  • Approve/eligible per AUS which means the borrower has an automated underwriting system approval
  • Referred/eligible per AUS which means the borrower may be eligible but the file needs to be manually underwritten by a human mortgage underwriter
  • Referred/with Caution means the borrower is not eligible for the particular loan program

What Is an AUS Approval Findings Mean?

The best findings to get on the AUS are approve/eligible. This means the borrower has been fully approved through Fannie Mae and/or Freddie Mac’s automated underwriting system (AUS) and meets all the mortgage agency guidelines. The AUS will also render a conditions sheet that needs to be satisfied in order for the loan to be valid. Gustan Cho Associates is a national mortgage company with no lender overlays. We just go off the automated findings and have zero lender overlays on government and conforming loans.

When Do Lenders Manually Downgrade AUS?

There are several reasons why lenders manually downgrade approve/eligible per automated underwriting system (AUS) approved files. Manual downgrade from AUS approval files could be voluntary as well. For example, if the borrower has an approve/eligible per AUS findings with credit disputes with a high credit score, they can voluntarily request a manual downgrade from AUS approval so they do not have to remove credit disputes. The main reason for manually downgrading AUS-approved borrowers to a manual underwrite is because they have credit disputes on non-medical collections. Non-medical credit disputes need to be removed if you want to continue with the mortgage process. Non-medical credit disputes need to be removed in order to proceed with the mortgage process UNLESS the file gets downgraded to a manual underwrite.

FHA Guidelines on Credit Disputes

Credit disputes are not allowed during the mortgage process. Credit disputes will halt the mortgage process until the credit disputes are removed. All credit disputes on non-exempt non-medical collection accounts need to get removed before the mortgage process can proceed.  Medical outstanding collection accounts are exempt from credit disputes. You do not have to retract credit disputes on medical collections. Zero balance non-medical collection accounts are exempt from retraction of credit disputes. If the total balance of the outstanding collection accounts totals less than $1,000, you do not have to remove the credit disputes. Credit disputes from derogatory credit tradelines that have been seasoned for longer than 24 months are exempt from retraction.

AUS-Approved Downgraded To Manual Underwriter Due To Credit Disputes

AUS-Approved Downgraded To Manual Underwriter Due To Credit Disputes

An approve/eligible per AUS approved file can have credit disputes remain and continue on with the mortgage process if the file is downgraded to a manual underwrite. If the borrower gets a refer/eligible per automated underwriting system with credit disputes on non-medical collections, all credit disputes need to be removed for the mortgage process to proceed. Other reasons for approved/eligible per the automated underwriting system to get downgraded to a manual underwrite is because of high debt to income ratios, low credit scores, too many large outstanding collections and charged-off accounts, and other derogatory credit tradelines.

Automated Approved Approved Downgraded To Manual Underwrite Due To Low FICO Scores

Mortgage lenders can turn down a borrower on FHA loans with 500 FICO credit scores who have a 10% down payment with an approve/eligible per automated underwriting system. The lender can deny any borrowers on FHA loans with 500 FICO even though they meet the minimum HUD Guidelines and require higher credit score requirements. The lender can require a 620 to 640 credit score as part of their overlays. Gustan Cho Associates is one of the very few national mortgage companies that have no lender overlays on FHA loans and other government and conventional mortgages.

Best FHA Lenders For Poor Credit Homebuyers

One lender may require a 640 credit score on FHA loans when lenders like Gustan Cho Associates will take borrowers with credit scores down to 500 FICO. Gustan Cho Associates is one of the very few national mortgage companies licensed in multiple states with no lender overlays on government and conventional loans. GCA Mortgage Group will just go off the AUS FINDINGS and not add any other lender overlays.

What Does Refer/Eligible per AUS Findings Mean?

Referred/eligible means the automated underwriting system cannot render a decision on an automated approval. Referred/eligible means a human mortgage underwriter needs to manually underwrite the file. All manual underwriting guidelines need to apply to FHA and VA manually underwritten loans. Lenders who are conservative and super careful can take fully AUS-approved borrowers and downgrade them to a manual underwrite. Why will a lender downgrade to a manual from an already AUS-approved borrower? Lenders do not want to take a chance on a scratch and dent mortgage loan.

Scratch And Dent Loans

Scratch and dent are when a loan cannot be sold on the secondary market to Fannie Mae and/or Freddie Mac and stays in-house as a junk loan. Lenders can sell scratch and dent loans on the open market at a discount. Lenders lose money on scratch and dent loans. This is why lenders are very careful that AUS-approved mortgages are saleable on the secondary mortgage bond market after the mortgage funds. Referred with Caution means the borrower does not qualify for a mortgage.

Mortgage Options on Manual Downgrade From AUS Approval on FHA Loans

Mortgage Options on Manual Downgrade From AUS Approval on FHA Loans

There are instances where borrowers with one or two late payments in the past 12 months may get an approve/eligible per the automated underwriting system. However, if the lender downgrades an automated approved borrower to a manual underwrite, they will not qualify under manual underwriting guidelines. All manual underwrites on FHA and VA loans need to have been timely in the past 24 months on all of their debt payments. If an automated underwriting system has approved borrower gets downgraded to a manual underwrite for one reason or another and cannot qualify for a manual underwrite, the only other option is to look for a different lender.

No Mortgage Overlay Lender For Bad Credit and Low FICO Scores

Gustan Cho Associates have no lender overlays and we never downgrade a fully automated underwriting system that has approved borrower to a manual underwrite. Please contact us at GCA Mortgage Group if you need to qualify for a mortgage with a national mortgage company licensed in 50 states with no lender overlays at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at GCA Mortgage Group is available 7 days a week, on evenings, weekends, and holidays.

This blog on Manual Downgrade Form AUS Approval was updated on June 26th, 2022