Manual Downgrade From AUS Approval

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.

Understanding The Automated Underwriting System During The Mortgage Process

YouTube player

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. Speak With Our Loan Officer for process your mortgage

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?

So we have been discussing the automated underwriting system and a manual downgrade from AUS approval so what are AUS findings? Dale Elenteny of Gustan Cho Associates is an expert on DU and LP automated underwriting system as well as AUS Findings. Dale is also an expert on how to get a refe/eligible to an approve/eligible by manevering the AUS Findings.

What does 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.

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

A common question asked by borrowers is what are the 3 C’s that underwriters evaluate? Mortgage underwriters overview on each file are called the 3 C’s. The 3 C’s oveview concept is applied prior to a manual dowgrade from AUS approval.

The reason for manual downgrade from AUS approval is to evaluate and assess the oveview in assessing the overall layered risk of each borrower by thoroughly making sure the mortgage loan applicant character, capacity, and capital in warranting a mortgage loan approval.

The mortgage underwriter’s role is to assess risk and make sure the lender will not have the loan default and face foreclosure. The underwrite need to assess credit risk of the borrower and the mortgage borrower has the ability to repay. 

With all this talk about automated approval, automated underwriting system, the 3 C’s, manual underwriting, layered risk of the lender, and loan level pricing adjustments, what does automated underwriting system look for? Mike Gracz of Gustan Cho Associates is one of our top operation leaders in the automated underwriting system and how to get a refer/eligible to an AUS approval. Click here to apply for mortgage loans

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

Why Would a FHA Loan be Downgraded?

A Federal Housing Administration (FHA) loan may be downgraded from an “‘Approve/Eligibe” status to a “Refer” or “Manual Underwriting” status for a few reasons:
  1. Credit Issues: If the borrower has recent or severe credit issues such as a low credit score, late payments, bankruptcies, or foreclosures, the automated underwriting system might flag the loan for further review.
  2. Debt-to-Income Ratio: FHA loans typically have more lenient debt-to-income (DTI) ratio requirements, but if the DTI is exceptionally high, a downgrade might be necessary to ensure the borrower can manage their mortgage payments along with other debts.
  3. Employment and Income Stability: If there are concerns about the stability or verifiability of the borrower’s employment and income, the loan could be downgraded. This can include frequent job changes, irregular income, or unverifiable income.
  4. Property Issues: If the appraisal of the property identifies significant problems or if the property does not meet FHA’s safety, security, and soundness standards, the loan might be downgraded.
  5. Incomplete Data or Documentation: Please include documents or data consistency during the loan process to avoid a downgrade. This might require a manual review to resolve the discrepancies.
  6. Loan Characteristics: Certain loan characteristics, such as loan amount or the type of financed property, might need to meet FHA’s lending guidelines.

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.

Manual underwriting requires a more thorough evaluation by a human underwriter. The underwriter assesses the borrower’s ability to repay the loan based on a more detailed analysis of their financial situation and the property. This process often addresses the concerns that led to the downgrade, allowing the borrower to still secure financing.

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.

What is the Manual Underwrite Ratio for FHA?

Specific debt-to-income (DTI) ratio guidelines must be adhered to for FHA loans that are manually underwritten. The DTI ratio measures a borrower’s monthly debt payments compared to their monthly income. Here are the general guidelines for DTI ratios on manually underwritten FHA loans:

  1. Front-End Ratio: The term “front-end ratio” signifies the proportion of income spent on housing expenses such as mortgage payments, property taxes, homeowners insurance, and any homeowners association fees. According to the FHA, borrowers should keep their front-end ratio below 31% of their gross monthly income.
  2. Back-End Ratio: This ratio considers all monthly debt obligations, housing costs, and other debts like credit card payments, car loans, student loans, etc. The recommended maximum back-end ratio for FHA loans is typically 43% of the borrower’s gross monthly income.

However, these ratios can be exceeded if there are compensating factors. The FHA allows for higher ratios under certain circumstances:

  • With one or two strong compensating factors, borrowers might be approved with a back-end ratio of up to 50%.
  • Compensating factors may include significant cash reserves, minimal increase in housing payment, additional income not reflected in effective income calculations or residual income.

Manual underwriting provides flexibility, allowing underwriters to assess each borrower’s unique financial situation. By considering compensating factors, underwriters can approve loans that exceed standard DTI guidelines, depending on the borrower’s overall creditworthiness. Click here to apply for FHA loan with us

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

Manual Downgrade From AUS ApprovalAn 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 approve/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. Gustan Cho Associates will just go off the AUS FINDINGS and not add any other lender overlays.

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.

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.

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 Gustan Cho Associates if you need to qualify for a mortgage with a national mortgage company licensed in 50 states with no lender overlays at 800-900-8569 or text us for a faster response. Or email us at The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. Click here to apply for mortgage with lender with no overlay

FAQ: Manual Downgrade From AUS Approval on FHA Loans

  • What is a manual downgrade from AUS approval on FHA loans?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.
  • Why would a lender manually downgrade an AUS-approved FHA loan?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.
  • What are the implications of not retracting credit disputes during the mortgage process?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.
  • What does an AUS provide in its findings? 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.
  • What are the 3 C’s that mortgage underwriters evaluate? 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.
  • Can FHA loans be manually underwritten if the AUS issues a referred/eligible decision? FHA and VA loans are the only loan programs allowing manual underwriting. USDA and conventional loans do not permit manual underwriting.
  • What are the DTI ratio guidelines for manually underwritten FHA loans? 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.
  • What does “Refer/Eligible” mean in AUS findings? “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.
  • What is Gustan Cho Associates’ policy regarding manual downgrades? 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.
  • What are “Scratch and Dent” loans? 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 May 2nd, 2024.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *