Understanding The Manual Underwriting Mortgage Process

This ARTICLE On Understanding The Manual Underwriting Mortgage Process 

If you have been following our blogs, you know Gustan Cho Associates are experts in manual underwriting on FHA and VA mortgage loans.

  • Over the years we have covered this topic a few times
  • In this blog, we will detail what to expect during the manual underwriting process
  • We will also cover how to best prepare to qualify for a mortgage
  • We will also discuss how to apply for a manually underwritten mortgage at Gustan Cho Associates

In this article, we will discuss and cover the topic of Understanding The Manual Underwriting Mortgage Process.

Understanding The Manual Underwriting Mortgage Process Versus Automated Underwriting System

What is the difference between a manual mortgage lending process and an automated risk assessment system?

Many lenders do not participate in manually underwritten mortgage loans.

  • That is because they are more difficult, and you require a little bit more work
  • Many investors do not allow for manually underwritten mortgage loans on the secondary market
  • Do not let that hinder you from applying for a mortgage
  • Even if you have been turned down by your current lender, we encourage you to reach out to Gustan Cho Associates
  • We are able to manually underwrite loans based on HUD guidelines with no additional LENDER OVERLAYS

This allows us to help more clients and most lenders.

What Does Manual Underwriting Mean

What is a manually underwritten mortgage loan?

For more information visit our MANUAL UNDERWRITING BLOG.

Understanding The Manual Underwriting Mortgage Process On FHA Loans

FHA manual underwriting requires a couple extra steps during the mortgage process.

  • There are credit requirements that vary depending on your credit score
  • If your credit score is below 580, you must have a 10% down payment
  • If your credit score is above 580, a 3.5% is required
  • Based on your credit score, your debt to income threshold will be established (see below)
  • You may need compensating factors to close a manually underwritten file

In the next paragraph, we will cover the list of compensating factors.

Understanding The Manual Underwriting Mortgage Process: Debt To Income Ratio Versus Credit Scores

DTI table based on credit score:

  • No credit score – DTI may not exceed 31 / 43
  • 500-579 – DTI may not exceed 31 / 43
  • 580 and above DTI is capped at 31 / 43 without ANY compensating factors
  • 580 and above DTI is capped at 37 / 47 with ONE compensating factors
  • 580 and above DTI is capped at 40 / 40 without discretionary debt
  • 580 and above DTI is capped at 40 / 50 with TWO compensating factors

Example Compensating factors:

  • Verified liquid reserves (3 months for 1-2 unit home, 6 months for 3-4unit homes)
  • Minimal increase in housing payment
  • Residual income

Besides your debt income ratio, your credit history and payment history will play a major factor in your qualifications.

  • For an FHA manually underwritten file, you may not have (non-medical) collection accounts in the past 12 months
  • You are allowed a late payment here and there on a credit card but not on installment debt

Please see our PAYMENT HISTORY BLOG for specifics on late payments on FHA manual underwriting.

Understanding The Manual Underwriting Mortgage Process On VA Loans

What is the manual mortgage lending process for VA loans

VA mortgage loans are a bit easier to close with manual underwriting. Ideally, a veteran cannot have late payments in the past 12 months to pass a VA manual underwrite.

  • The underwriter must verify on time rent payments which usually do not report to credit
  • This is completed with canceled rent checks or a verification with a professional management company
  • It is also important to understand that if your debt-to-income ratio is above 41% with a VA manually underwritten mortgage
  • You must pass your residual income qualifications by 120%
  • For many veterans who receive fixed income, you may not use the grossed up income to qualify for residual income
  • Residual income is based off your actual income figures

Please see your blog on GROSSING UP FIXED INCOME and RESIDUAL INCOME for more information.

Understanding The Manual Underwriting Mortgage Process: The Importance Of Compensating Factors On Manual Underwrites

There are ways to help your overall mortgage application.

  • The stronger your manual underwrite compensating factors are, the more likely you are to be approved
  • Also as seen above, with FHA mortgages, the more compensating factors you have, the higher your debt-to-income ratios may go
  • This allows you to qualify for a larger loan amount
  • Other tips and tricks besides compensating factors we have seen in the past
  • Completing the Fannie Mae FRAMEWORK HOME COUNSELING class is a great indication to the underwriter that you are serious about homeownership
  • Taking a few hours out of your busy schedule to complete this task will help the overall strength of your loan

Mortgage underwriters have a lot of power and underwriter discretion on manual underwrites. This  holds especially true with VA mortgage lending. The mortgage underwriter discretion is a large part of manual underwriting.

The Ability To Repay Your New Mortgage

An underwriter wants to make sure that you will be able to afford this home and not run into any financial problems in the future.

  • Qualifying for too much house may result in foreclosure
  • A foreclosure can be devastating to your credit as well as your life in general
  • If you do enter into a foreclosure, homeownership is next to impossible for the next couple years
  • We want to make sure this is a situation you do not have to deal with
  • The Fannie Mae framework class will teach you many things to expect during homeownership
  • As a renter you have the ability to pick up your phone and call your landlord but as a homeowner, you are responsible to take care of any damages yourself
  • A major appliance can go out at any time and cost a substantial amount of money to fix

The Fannie Mae framework class will go over specific examples of what to expect.

Understanding The Manual Underwriting Mortgage Process: Requests For Tons Of Letters Of Explanations By Mortgage Underwriters

Letters of explanation for derogatory credit:

  • As part of the manual underwriting process, it is important to complete letters of explanation for any derogatory credit items
  • FHA and VA have slightly different requirements for what derogatory credit needs to be addressed
  • When addressing a derogatory account to an underwriter, it is important to be short and sweet but to the point
  • An underwriter will need to understand what happened in your life to create a derogatory account, what you did to rectify the account, and most importantly, why an event such as this will not happen again in the future
  • A loan officer cannot complete the letter of explanation for you but can give you some hints on what an underwriter is looking for
  • An underwriter wants to understand that this was an isolated incident and will not happen again in the future
  • If you have a long history of derogatory credit, this will play a factor in your mortgage qualifications
  • It is important to pay all your bills on time and establish monthly savings

An underwriter can ask for an overall monthly budget to make sure you can comfortably afford the payment even if you fit the debt-to-income requirements.

Manual Underwriting Versus AUS Approval Underwriting Mortgage Process

What is manual loan and AUS approved mortgage granting process

Applying for a manually underwritten loan with Gustan Cho Associates is the same process as any other mortgage loan.

  • First, you call Mike Gracz on 630-659-7644. After a brief mortgage consultation, Mike will pair you with a licensed loan officer
  • From there, you will fill out an online application link and upload the required documentation
  • Depending on the loan program and what you do for a living, the documentation you sent will be different
  • Your loan officer will know what to request
  • Once your loan officer has your credit report checked and the required documentation, they will then crunch the numbers and see exactly what you qualify for
  • At this time, the loan officer will run your file through the automated underwriting system
  • The results of the automated underwriting system will let us know if we need to manually underwrite your file
  • The next step will be issuing a pre-approval letter or coming up with a financial plan to qualify as soon as possible
  • Once you are pre-approved, you will go house shopping with your realtor

Once you receive an executed contract, your loan officer will send you the proper loan documents to sign.

Importance Of Qualifying For A Mortgage With A Lender With No Lender Overlays

During the COVID-19 coronavirus outbreak most lenders added additional guidelines to their mortgage products. Gustan Cho Associates have not had to add any additional overlays to their mortgage products. During these unprecedented times and low-rate environment, it is a great time to buy or refinance a property. Even if you have been turned down by your current lender, we encourage you to reach out to us today. The team at Gustan Cho Associates can be reached seven days a week on 630-659-7644. You may also text that phone number or email [email protected] We look forward to helping you and your family with your mortgage needs. Our staff takes pride in being educated on the changing mortgage guidelines. It is important to have a well-educated mortgage team working for you. As we enter 2021, we expect rates to remain low. We are here to help you take advantage of the market!

Leave a comment