Manual Underwriting Mortgage Guidelines On VA And FHA Loans
This BLOG On Manual Underwriting Mortgage Guidelines On VA And FHA Loans Was UPDATED And PUBLISHED On August 8th, 2019
The mortgage approval process starts when borrowers complete the official mortgage application also called 1003. Borrowers also need to provide necessary documents such as the following:
- two years tax returns
- two years W2s
- 60 days bank statements
- recent paycheck stubs
- divorce decree if applicable
- letters of explanations for credit inquiries and/or derogatory information
- bankruptcy discharged paperwork
- other documents verifying the items stated on the mortgage application
In this article, we will cover and discuss Manual Underwriting Mortgage Guidelines On VA And FHA Loans.
Steps In The Mortgage Process
The mortgage loan originator then pulls credit from the three credit reporting agencies.
- The mortgage application and credit report is then submitted to the Automated Underwriting System for an automated approval
Within minutes, the Automated Underwriting System will render its decision as follows:
- approve/eligible which is basically an automated approval
- refer/eligible which means that the automated underwriting system cannot render an automated approval and needs to be manually underwritten
- refer/caution which is an automated denial
Types Of Automated Underwriting System
There are two different types of Automated Underwriting System:
- Fannie Mae’s Desktop Underwriter, also known as DU
- Freddie Mac’s Automated Underwriting System which is known as Loan Prospector or LP
Majority of lenders will run DU versus LP. This is because they are not a Freddie Mac approved mortgage lender.
- If borrowers get an approve eligible per DU FINDINGS, it is an automated approval with conditions
- Some of these conditions may require the following:
- rental verification
- other items in order for the DU FINDING to be a valid approve/eligible
Automated Underwriting System Conditions
There are times when borrowers will get an approve/eligible per DU FINDINGS but cannot deliver on the conditions:
- For example, the approve/eligible DU FINDINGS may condition that the mortgage loan applicant needs rental verification
- A rental verification can only be acceptable if renters can provide 12 months canceled checks and/or bank statements paid to landlords
- Renters renting from the property management company, a Verification Of Rent (VOR) Form provided by the lender can be completed by the property manager and signed and dated
- VOR Form can be used in lieu of 12 months canceled checks and/or bank statements
- Renters who cannot provide canceled checks and have been paying the landlord with cash, then approve/eligible per DU FINDINGS will be null and void since it was conditioned on AUS
- What can the mortgage loan applicant do?
Mechanics Of Automated Underwriting System
The Automated Underwriting System is an extremely sophisticated computer system that will evaluate every aspect of borrowers.
The following is analyzed by the Automated Underwriting System:
- credit history
- credit scores
- public records
- asset, income
- late payments
- collections/charged-off accounts
- bankruptcy and/or housing events
- late payments after bankruptcy and/or housing event
- special emphasis placed on payment history in the past 12 months
Fannie Mae Versus Freddie Mac
Borrowers who cannot provide conditions requested by Fannie Mae’s Desktop Underwriter’s DU FINDINGS, then mortgage loan originator can submit the file to Freddie Mac’s Loan Prospector Automated Underwriting System. There are times where Fannie Mae may not render an approve/eligible but Freddie Mac will.
- There are many times where conditions requested by Fannie Mae’s Automated Underwriting System is not conditioned from Freddie Mac’s Automated Underwriting System
- As with the rental verification example, Fannie Mae’s Automated Underwriting System can condition it
- But Freddie Mac’s Automated Underwriting System may not request it
- However, if Freddie Mac’s LP Findings conditions rental verification and the mortgage loan applicant cannot provide it, what do you do?
- Loan Officers can run both Fannie and Freddie and see which system to go with
Manual Underwriting Guidelines
Manual Underwriting is when a mortgage underwriter needs to review the file and manually underwrite the borrowers’ file.
- Borrowers cannot have any late payments in the past 12 months
- Verification Of Rent is required on all manual underwrites
- Cases, where borrowers have credit disputes and cannot retract them, needs to be downgraded to manual underwrite
- All VA Loans And FHA Loans with borrowers in a Chapter 13 Bankruptcy Repayment Plan needs to be manually underwritten
- All VA and FHA Home Loans after Chapter 13 Bankruptcy discharge but with less than 2 years seasoning needs to be manually underwritten
Maximum DTI Guidelines On Manual Underwriting
Maximum debt to income ratio allowed on manual underwrites is capped at 50% with compensating factors:
- Examples of compensating factors are the following:
- Less than 5% payment shock
- Reserves of Principal, Interest, Taxes, Insurance (PITI)
- The second job with at least one-year seasoning but not two years yet that is not used as qualified income
Conditions Requested By Underwriters During Approval Process
There are many mortgage loan applicants who get an automated approval by Fannie Mae’s and/or Freddie Mac’s Automated Underwriting System but cannot qualify due to the fact because they cannot provide conditions requested.
- Rental verification, employment verification, minimum credit tradelines, reserves are some of the conditions that the automated underwriting system may require
- If borrowers get a refer/eligible per AUS, it can be downgraded to manual underwriting
- Not all lenders do manual underwriting
- Manual Underwriting is only offered by a few mortgage lenders
- Manual Underwriting is when the file is manually underwritten by a mortgage underwriter
- The underwriter will evaluate the whole mortgage file manually
- Will look for compensating factors in deciding whether or not to approve
- Manual underwrites are files needs to meet all mortgage guidelines
Gustan Cho Associates are direct lenders with no overlays on government and conventional loans. We offer manual underwriting on VA Home Loans and FHA Mortgages. Borrowers who need to qualify for a mortgage with a direct lender with no mortgage overlays can contact us at 262-716-8151 or text us for faster response. Or email us at email@example.com.