Manual Downgrade From AUS Approval on FHA Loans

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Manual Downgrade from AUS Approval: What It Means and How to Get a Mortgage in 2025

Getting a mortgage can feel like a roller coaster. One minute, you’re told you’re approved. The next? You’re told your file is being downgraded. If you’ve heard the words “manual downgrade from AUS approval,” you’re not alone. And don’t worry—you’re not out of options.

This guide will explain what a manual downgrade from AUS approval means, why it happens, and how you can still get approved for an FHA loan—even if your loan gets downgraded. At Gustan Cho Associates, we specialize in helping borrowers who face this situation with no lender overlays and fast closings.

What Is a Manual Downgrade from AUS Approval?

A manual downgrade from AUS approval happens when your loan was initially approved by the Automated Underwriting System (AUS), but the lender decides to manually underwrite the loan instead. This means a human underwriter will review your file more closely.

Why would they do this? Often because the lender thinks there are risks that AUS missed. Sometimes, it’s due to lender overlays (extra rules added by the lender).

At Gustan Cho Associates, we do not downgrade AUS-approved loans unless it’s absolutely necessary under HUD guidelines.

Understanding AUS Approval vs. Manual Underwriting

When you apply for a mortgage, your loan is run through an AUS like:

• DU (Desktop Underwriter) by Fannie Mae
• LP (Loan Prospector) by Freddie Mac

These systems analyze your credit, income, and debt. The three main findings are:

• Approve/Eligible – You’re good to go (with conditions)
• Refer/Eligible – Needs manual underwriting
• Refer/With Caution – Not eligible

You should be on track for approval if you get an Approve/Eligible. But some lenders still downgrade, especially if they have overlays.

Why Would a Lender Manually Downgrade Your AUS Approval?

There are several reasons your loan could be downgraded:

• Low credit score (under 620)
• High debt-to-income (DTI) ratio
• Recent late payments or collections
• Open credit disputes
• Bankruptcy or foreclosure history
• Missing or inconsistent documentation

Some lenders downgrade automatically due to these issues, even when not required by HUD. That’s an overlay.

We don’t do that. At Gustan Cho Associates, we follow only HUD/FHA guidelines. No overlays.

Can You Still Get a Mortgage After a Manual Downgrade?

Yes, it is still possible to obtain a mortgage after a manual downgrade, but you must meet specific manual underwriting guidelines. For FHA loans, this means having on-time payments for the last 12 to 24 months, particularly for housing payments. Additionally, you must adhere to debt-to-income (DTI) limits, including a front-end DTI of 31% for housing-related expenses and a back-end DTI of 43% for all debts.

You may qualify for higher DTI if you have compensating factors like:

• One month of cash reserves
• Verified on-time rent history
• A second job (not used to qualify)
• Low payment shock from renting to owning

Manual Downgrade from AUS Approval Due to Credit Disputes

Credit disputes are among the most common reasons for a manual downgrade from AUS approval.

FHA requires disputes on non-medical collections over $1,000 to be resolved before AUS can be used. But there’s a workaround:

You don’t have to remove the disputes if you downgrade the file to manual underwriting.

This protects your credit score from dropping due to retracted disputes.

Medical collections are exempt and do not require dispute removal.

What Happens If You Can’t Qualify Under Manual Guidelines?

If you do not meet the manual underwriting guidelines, you may be unable to proceed with your application. However, there are two options available to you. First, search for a new lender who does not downgrade AUS-approved files. Alternatively, you can address the underlying issues by removing disputes, paying down debt, or improving your credit.

If your current lender downgraded your AUS approval and now you don’t qualify, contact Gustan Cho Associates. We accept AUS-approved files as they are, without additional overlays.

Case Example: Manual Downgrade That Wasn’t Needed

Situation: James applied for an FHA loan. He got an Approval/Eligibility with a 580 FICO and 54% DTI. However, his lender downgraded him to manual underwriting due to his low credit score.

Result: James no longer qualified due to his DTI.

Solution: James switched to Gustan Cho Associates. We accepted his AUS approval without downgrading, and he closed his loan in 21 days.

Manual Underwriting Guidelines for FHA Loans (2025)

The manual underwriting guidelines for FHA loans in 2025 establish strict rules for manually underwritten loans, particularly concerning debt-to-income (DTI) ratios. The front-end DTI should not exceed 31%, while the back-end DTI is capped at 43%. However, with the presence of compensating factors, the limits can be extended: a front-end DTI of up to 37% and a back-end DTI of 47% can be considered with one compensating factor, and up to 40% for the front-end and 50% for the back-end with two compensating factors.

Examples of compensating factors include verifying cash reserves for three months, maintaining residual income above the guidelines, and demonstrating a history of on-time housing payments.

Manual Downgrade Due to Low FICO Score

FHA allows credit scores down to 500 with 10% down or 580+ with 3.5% down. However, many lenders require 620+ or even 640+.

This is another example of lender overlays.

If you were downgraded just because your score is 580, that’s not an FHA rule—that’s the lender’s choice.

At Gustan Cho Associates, we accept borrowers with credit scores starting from 500, provided they adhere to FHA guidelines.

How to Avoid a Manual Downgrade

• Work with a no-overlay lender (like Gustan Cho Associates)
• Avoid new credit disputes
• Keep your payment history clean
• Ask your loan officer what triggered the downgrade
• Get a second opinion if you feel the downgrade wasn’t necessary

Bottom Line: Don’t Let a Manual Downgrade Derail Your Homeownership Dreams

Getting a manual downgrade from AUS approval doesn’t mean the end of the road. Many lenders add extra rules that can block your approval even when the AUS says yes. At Gustan Cho Associates, we trust the AUS findings and help borrowers get approved without overlays.

If your lender downgraded your loan and you’re stuck, let us help you get back on track. We’re licensed in 50 states and close loans fast.

Need Help with a Manual Downgrade from AUS Approval?

Call us at 800-900-8569, text us, or email alex@gustancho.com. Our team is available 7 days a week, evenings, weekends, and holidays. Let’s get your loan approved the right way—with no overlays, no hassle, and no delays.

FAQ: Manual Downgrade From AUS Approval on FHA Loans

Q: What is a Manual Downgrade from AUS Approval on FHA Loans?

A: A manual downgrade occurs when a lender reviews a loan application more thoroughly instead of relying solely on the Automated Underwriting System (AUS) decision. This is common if the loan is considered marginal, such as when the borrower has a lower credit score or high debt-to-income ratios despite receiving an initial approved/eligible decision.

Q: Why Would a Lender Manually Downgrade an AUS-Approved FHA Loan?

A: Lenders may manually downgrade a loan to address concerns like high debt-to-income ratios, low credit scores, unresolved credit disputes, or other factors that increase the risk of default. Manual reviews allow for a more detailed assessment of these risks.

Q: What are the Implications of Not Retracting Credit Disputes During the Mortgage Process?

A: If credit disputes are not retracted, the process could halt. However, by opting for a manual downgrade, borrowers can continue with their application without needing to retract disputes, except for non-medical collection accounts, which must be resolved.

Q: What does an AUS Provide in its Findings?

A: The AUS quickly evaluates a borrower’s financial and credit information to render one of three decisions: approve/eligible, referred/eligible, or referred/with caution. Each category reflects the level of manual intervention needed before proceeding.

Q: What are the 3 C’s that Mortgage Underwriters Evaluate?

A: The 3 C’s stand for Character, Capacity, and Capital. These are key factors underwriters consider when assessing the risk level of a loan application, determining the borrower’s reliability, ability to repay, and financial resources.

Q: Can FHA Loans be Manually Underwritten if the AUS Issues a Referred/Eligible Decision?

A: FHA and VA loans are the only loan programs allowing manual underwriting. USDA and conventional loans do not permit manual underwriting.

Q: What are the DTI Ratio Guidelines for Manually Underwritten FHA Loans?

A: For FHA loans, the front-end ratio should not exceed 31% of gross monthly income, and the back-end ratio should not exceed 43%. These limits can be exceeded with strong compensating factors like significant cash reserves or a minimal increase in housing payment.

Q: What Does “Refer/Eligible” Mean in AUS Findings? “

A: Refer/Eligible” means the AUS cannot fully approve the loan independently and requires manual underwriting. A human underwriter must review the application to determine if it meets FHA or VA loan requirements.

Q: What is Gustan Cho Associates’ Policy Regarding Manual Downgrades?

A: Gustan Cho Associates does not perform manual downgrades from AUS approvals on FHA loans. They operate with no lender overlays, strictly following the AUS findings without additional restrictions.

Q: What are “Scratch and Dent” Loans?

A: These loans do not meet the secondary market standards of Fannie Mae or Freddie Mac and cannot be sold as planned. They are often sold at a discount in the open market, resulting in losses for lenders. This risk motivates lenders to be cautious and potentially downgrade AUS-approved loans to manual underwriting to ensure all guidelines are thoroughly met.

This blog on Manual Downgrade Form AUS Approval was updated on June 27th, 2025.