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

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. 

What Does The Automated Underwriting System Look For?

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

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