Mortgage Approval Process On Manual Underwriting

Mortgage Approval Process On Manual Underwriting

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss the mortgage approval process on manual underwriting. There are instances where mortgage borrowers’ applications need to be manually underwritten. Not all lenders do manual underwrites. VA and FHA loans allow manual underwriting. Conventional loans do not.

What Is The Automated Underwriting System

All mortgage loan applications need to go through the Fannie Mae and/or Freddie Mac Automated Underwriting System (AUS). The automated underwriting system is a very sophisticated intricate computerized system that will analyze the borrower’s credit report. 1003’s, and other data of the borrower and render an automated decision. An automated approval is when the borrower gets an approve/eligible per the automated underwriting system. However, there are times when the AUS will render a refer/eligible. Refer/eligible findings mean the file can be downgraded to a manual underwrite on FHA and VA loans.

Mortgage Approval Process On Manual Underwriting On FHA And VA Loans

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The following loan programs are very popular with manual underwriting:

  • FHA loans
  • VA loans

Manual Underwriting on FHA and VA Loans

Mortgage Approval Process On Manual Underwriting is started when the Automated Underwriting System cannot render an approve/eligible per AUS FINDINGS. When AUS renders a referred/eligible per AUS FINDINGS, it means that the automated system cannot render an automated underwriting system approval. The lender can proceed with approving borrowers with a downgrade to manual underwriting. A large percentage of our borrowers at Gustan Cho Associates are manual underwriting on FHA and VA loans. In this article, we will cover and discuss the mortgage approval process on manual underwriting. FHA and VA loans are the only two mortgage loan programs that allow for Manual Underwriting.

How Mortgage Underwriters Process Manual Underwrites Versus Automated Underwriting

There is not too much difference between manual underwriting versus automated underwriting.
Both types of underwriting are processed the same way. Underwriters will have more scrutiny during the mortgage approval process on manual underwriting versus automated approvals. The major difference between manual versus automated underwriting is the debt to income ratio caps are lower on manual underwrites. Compensating factors play an important role for borrowers with higher debt-to-income ratios. The maximum debt to income ratios on both FHA and VA loans on manual underwriting is normally capped at 50% DTI.

Mortgage Underwriter Discretion On Manual Underwriting

Mortgage underwriters have a lot of underwriter discretion on manual underwrites. If the borrower has multiple compensating factors, the mortgage underwriter has the discretion to exceed the 50% DT threshold. This holds especially true for VA loans. VA loans do not have a maximum debt-to-income ratio caps on automated underwriting system approvals for borrowers with strong residual income.

What Are Compensating Factors on Manual Underwriting?

Compensating factors, higher credit scores, established credit tradelines, residual income, and the ability to repay are the main factors mortgage underwriters will focus on for borrowers who are manually underwritten. We have seen our mortgage underwriters issue loan approvals with 54% DTI on manual underwriting on VA loans due to strong compensating factors and good residual income.

How Mortgage Underwriters Review Manual Underwrites

There are many case scenarios from borrowers. To qualify for a residential mortgage loan, there are two extremely important things borrowers need to meet:

  • The ability to repay
  • Income
  • Qualified income
  • Credit
  • Reserves and assets
  • Minimum credit score requirements
  • Income is probably the most important factor

How Underwriters Look at Credit on Manual Underwrites


  • Credit is super important as well
  • Timely payment history
  • Borrowers need to meet the minimum credit scores and have timely payments in the past 12 months
  • Lenders can work on helping improve credit so mortgage applicants can qualify for home loans

As long as borrowers have the income they will qualify because credit scores fluctuate month to month.

Qualified Income Versus Bad Credit

Borrowers with qualified income but bad credit can qualify for a mortgage loan as follows:

  • Borrowers can have prior bad credit, outstanding collections, and/or charged-off accounts, and other PRIOR derogatory credit tradelines, but they need to have rebuilt and/or re-established credit after the period of bad credit.
  • For our clients who come to us to qualify for a mortgage, the key is when and not if they will qualify for a mortgage.
  • Bad credit is like a hangover.
  • Bad credit can be fixed.
  • Lower credit scores will go back up over time and the last derogatory credit tradeline ages.
  • However, if borrowers have excellent credit but no income, they will not qualify for a mortgage loan until they have a stable income source.

Income needs to be stable and likely to continue for the next three consecutive years.

Mortgage Guidelines On Manual Underwriting

Income and credit are not the only requirements only two factors underwriters analyze. The borrower needs to meet the federally mandated mortgage lending guidelines for the mortgage loan program they apply for:

  • FHA
  • VA
  • USDA
  • Fannie Mae
  • Freddie Mac
  • Portfolio
  • jumbo
  • Other mortgage loan programs

Agency Guidelines Versus Overlays By Mortgage Lenders

Every mortgage loan program has two sets of mortgage lending guidelines:

Lenders overlays are additional lending requirements that are above and beyond agency guidelines.

What Are Mortgage Overlays?

Just because borrowers meet the required federal mandatory lending guidelines for a mortgage does not mean that they are home free. Not all lenders have the same Mortgage Approval Process On Manual Underwriting. Most lenders have mortgage overlays on government and conventional loans. Fortunately, Gustan Cho Associates has zero lender overlays on government and conventional loans. Every lender needs to meet the minimum mortgage guidelines by FHA, VA, USDA, Fannie Mae, and/or Freddie Mac.

Why Do Lenders Have Mortgage Overlays?

Lenders are allowed to have higher lending standards called overlays. Each lender might have its own mortgage lender overlays, which are additional extra guidelines on top of the federal guidelines. For example, FHA only requires a 580 score for a borrower to qualify for a 3.5% down payment FHA loan. However, a bank might require a 640 credit score which is 60 points above the federally required minimum credit score of 580 to qualify for FHA Loans.

Mortgage Companies With No Overlays on Manual Underwriting

There are mortgage lenders like Gustan Cho Associates that have no overlays on government and conventional loans. Whatever the federal minimum requirements are will be mortgage loan approval as long as borrowers can meet the conditions of AUS. Borrowers who are looking for a mortgage company with no lender overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at

When Is Manual Underwriting Required

Case Scenarios On Mortgage Approval Process On Manual Underwriting

There is more scrutiny with the Mortgage Approval Process On Manual Underwriting versus borrowers with an automated underwriting system approval. I get calls every day from folks who have unique case scenarios and who are interested in purchasing a home.  I will be covering individual unique case scenarios in future blogs.

Some examples of case scenarios we will be covering are the following:

Quitting job during the mortgage approval process:


  • Some lenders deny those with any overdrafts in the past 12 months

Recent late payments:

  • Late payments in the past 12 months is not a deal killer but most lenders require timely payments in the past 12 months

Open collections:

  • Outstanding collections and charged-off accounts do not have to be paid to qualify for home loans with Gustan Cho Associates

Judgments And Tax Liens:

Divorce during the mortgage loan process where future ex-spouse refuses to sign paperwork:

Currently living in a home that is under the spouse’s name but needs to qualify for a new mortgage loan:

  • Case of where mortgage lenders can classify as a bail

Inheriting a home that is under foreclosure:

  • Timeshare foreclosure
  • High debt to income ratios and solutions

Waiting periods after the following:

Gustan Cho Associates offers non-QM loans one day out of bankruptcy and foreclosure.

Mortgage Guidelines With Late Payments After Bankruptcy And/Or A Housing Event

Late payments after bankruptcy and foreclosures are frowned upon by lenders but are not deal killers. The following line items may become issues when applying for a mortgage:

  • Open collections, charge-offs, late payments
  • What constitutes a mortgage bail
  • Mortgage lender overlays

Bad credit, no credit, no credit scores, and the use of non-traditional credit:

  • Non-Traditional Credit Tradelines accepted on manual underwrites
  • Low appraisal, appraisal rebuttal, appraisal review
  • Sellers concessions and lender’s credit toward closing costs
  • Our new Home Buyers Preparation Program for home buyers with bad credit and very poor credit history

Do All Lenders Do Manual Underwrites?

Not all lenders do manual underwriting on FHA and VA loans. Gustan Cho Associates are experts in originating and funding VA and FHA manual underwriting borrowers. Both VA and FHA have the same Manual Underwriting Guidelines:

Here are the requirements for manual underwriting:

  • Meet minimum credit score requirements of 580 for both VA and FHA loans
  • Timely payments on all payments in the past 12 months

Verification of Rent Required on Manual Underwriting

Mortgage Approval Process on Manual Underwriting: Verification Of Rent:

  • Payment Shock is extremely important
  • Verification Of Rent is only valid if the renter can provide 12 months of canceled checks and/or bank statements paid to the landlord
  • Cash payments to the landlord are not valid and will not be accepted as rental verification
  • Those living with family may get an exemption on Verification of Rent requirements but is not viewed favorably

How Do Lenders View Gift Funds

Mortgage approval process on manual underwriting: gift funds are not viewed favorably:

  • Reserves and larger down payment is viewed as compensating factors
  • Debt to Income Ratios is capped at 50% DTI with compensating factors
  • VA and FHA Borrowers can qualify for manual underwriting one year into a Chapter 13 Bankruptcy Repayment Plan
  • There is no waiting period after the Chapter 13 Bankruptcy discharged date with Manual Underwriting on VA Loans and FHA Loans

VA and FHA Borrowers looking to qualify for a mortgage with no mortgage overlays on VA and FHA Manual Underwriting can contact us at Gustan Cho Associates 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.

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