In this article, we will discuss and cover manual underwriting during Chapter 13 Mortgage Process. Homebuyers can qualify for an FHA loan and/or VA loan while in an active Chapter 13 Bankruptcy repayment plan via manual underwriting. Manual underwriting is only allowed on FHA and VA loans. No other loan program permits manual underwriting. There is no huge difference between manual underwriting and automated underwriting system (AUS). The only major difference between manual underwriting during Chapter 13 Mortgage Process versus automated underwriting system (AUS) is restrictions on debt-to-income ratios on manual underwrites. Debt to income ratio caps depends on the number of compensating factors on manual underwriting. We will go over manual underwriting during Chapter 13 mortgage process as well as right after Chapter 13 Bankruptcy discharge.
How Long Does Manual Underwriting Take?
Manual underwriting during Chapter 13 mortgage process does not take much longer than an automated underwriting system (AUS) file. Most mortgage lenders who do manual underwriting on FHA and VA loans can zip right through a file just like an automated underwriting system file. The only major difference between manual versus automated underwriting system approvals is the underwriter places more emphasis on the borrower’s ability to repay on manual underwriting. Also, there is a restriction on the maximum debt-to-income ratio cap on manual underwriting. The number of compensating factors determines the front-end and back-end debt-to-income ratio on manual underwriting.
Best Manual Underwriting Mortgage Companies
Per HUD Manual Underwriting During Chapter 13 Mortgage Process, borrowers can qualify for FHA land VA loans during Chapter 13 Bankruptcy Repayment Period. Chapter 13 Bankruptcy does not have to be discharged to qualify for FHA and VA Loans. Although HUD Manual Underwriting During Chapter 13 Mortgage Process allows borrowers to qualify for an FHA and/or VA loan on a home purchase and/or refinance, many mortgage companies will not allow this because of lender overlays. Lender overlays are additional mortgage guidelines above the minimum guidelines of HUD that lenders impose.
What Mortgage Loan Programs Can You Do Manual Underwriting?
HUD and the VA are the only two agencies that allow borrowers in Chapter 13 Bankruptcy repayment plan to qualify for a mortgage with Trustee Approval on FHA and VA loans. HUD and VA are the only two loan programs that allow manual underwriting. Agency guidelines on FHA and VA loans for qualification requirements on manual underwriting are almost the exact same. So are the eligibility requirements to qualify for a mortgage during the Chapter 13 Bankruptcy repayment plan. Both FHA and VA loans do not have any waiting period requirements after the Chapter 13 Bankruptcy discharge date.
Do All Lenders Have The Same Manual Underwriting Guidelines?
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All lenders need to meet minimum HUD Guidelines per HUD 4000.1 FHA Handbook. Lenders can have higher standards on FHA loans called lender overlays. Most lenders have lender overlays on government and conventional loans. Gustan Cho Associates is one of the very few lenders that have no lender overlays on government and conventional loans. We just follow the minimum HUD Mortgage Guidelines. We just follow the automated findings of the automated underwriting system (AUS). FHA and VA files that cannot get an AUS approval and get a refer/eligible per AUS can be manually underwritten. We have no other overlays. In this article, we will cover and discuss HUD Chapter 13 Manual Guidelines.
HUD Manual Underwriting During Chapter 13 Mortgage Process Versus Other Loan Programs
FHA and VA Loans are the only loan programs that allow borrowers in an active Chapter 13 Bankruptcy Repayment plan to qualify for home loans. VA and HUD Chapter 13 Manual Guidelines are almost the same. Agency Guidelines of the VA and HUD Chapter 13 Manual Guidelines allow borrowers to qualify for VA and/or FHA Loans during Chapter 13 Repayment Plan Trustee Approval is required. Most Trustees will sign off on a home loan during Chapter 13 Bankruptcy Repayment Plan. This only holds true as long as the borrower is able to afford it.
Mortgage Approval After Chapter 13 Bankruptcy Discharge
There are no waiting period requirements to qualify for FHA and/or VA Loans after the Chapter 13 Bankruptcy discharged date. For any Chapter 13 Bankruptcy discharge that has not been seasoned for at least 24 months, the VA and/or FHA file needs to be manually underwritten. Manual underwriting guidelines apply.
VA-FHA Manual Underwriting Guidelines
FHA and VA loans have almost identical manual underwriting guidelines. Automated findings of refer/eligible per AUS can be downgraded to manual underwriting on VA and FHA Loans. Here are the manual underwriting guidelines:
- No late payments in the past 12 months
- Verification of rent required on all manual underwriting
- Borrowers without verification of rent and living with family to save money for the down payment and closing costs on the home purchase can complete a living-with-family rent-free letter
- This letter is provided by the lender
- If the borrower is in an active Chapter 13 Bankruptcy Repayment Plan, the Bankruptcy Trustee needs to approve the home purchase transaction
- There is no waiting period after the Chapter 13 Bankruptcy discharge date to qualify for VA and/or FHA Loans
- One or two late payments in the past 24 months is not always a deal killer with extenuating circumstances
- Manual Underwriting requires one month’s of reserves
- Reserves are one month’s principal, interest, taxes, and insurance
- Reserves need to be the borrower’s own funds and cannot be gifted
Debt To Income Ratio caps is dependent on the amount of compensating factors.
Debt To Income Ratio on Manual Underwriting Versus Compensating Factors
Debt to income ratio caps is limited on manual underwriting. Here are the maximum debt-to-income ratio requirements on manual underwrites:
- 31% front end and 43% back end with no compensating factors
- 37% front end and 47% back end with two compensating factors
- 40% front end and 50% back end with two compensating factors
Gustan Cho Associates allows up to 54% debt to income ratio on manual underwriting on VA Loans.
What Are Compensating Factors on Manual Underwriting?
Compensating Factors are positive factors considered by mortgage lenders on manual underwriting during Chapter 13 mortgage process. Here are examples of compensating factors:
- 3 months of reserves
- Qualified income such as part-time income with at least one-year seasoning but not used in qualifying for the loan
- Larger down payment on a home purchase
- Habit and history of saving money
- Payment shock of less than 5% from renting to the new mortgage payment determined by rental verification
For more information on the contents of this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at email@example.com. The team at Gustan Cho Associates are experts in manual underwriting during Chapter 13 mortgage process on FHA and VA loans.
June 21, 2022 - 5 min read