FHA Manual Underwriting Guidelines

FHA Manual Underwriting Guidelines

FHA Manual Underwriting Guidelines apply to mortgage loan applications that cannot pass through the Automated Underwriting System (AUS) and need further research before giving an approval/denial for the loan.  FHA Manual Underwriting means that a mortgage underwriter will manually underwrite the loan and will take a closer look at the entire application:

Mortgage underwriters will be questioning derogatory credit information, public records, debt to income ratios, as well as looking for compensating factors for approval per FHA Manual Underwriting Guidelines.  If you are wondering what compensating factors are, they are positive factors that borrowers have that will work to offset bad credit or negative marks against your approval. 

Table of Contents

What Does It Mean A Mortgage Loan Needs To Be Manual Underwritten?

What Does It Mean A Mortgage Loan Needs To Be Manual Underwritten?

If an FHA loan cannot get an approve/eligible per automated underwriting system (AUS) and gets a refer/eligible findings, the file can be eligible for manual underwriting. Other times when the file gets manually underwritten is when an approve/eligible per AUS file gets downgraded to a manual underwrite due to being high risk under the lender’s eyes.

Why Do Lenders Manually Underwritten Files When It Is AUS Approved?

For example, if a borrower gets an AUS approval but barely makes it, even though it is an AUS approved file, the lender may have overlays where the underwriter can downgrade the file to a manual underwrites.  Examples, when this happens, is when the borrower has a large number of unpaid collections, high debt to income ratio, low credit score, multiple jobs in the past two years, and/or other layered risk factors under the eyes of the underwriter.

Do All FHA Lenders Downgrade AUS Approved Files To Manual Underwriting If Borrower Barely Meets FHA Guidelines?

Borrowers with an approve/eligible per AUS should never get their files downgraded to manual underwriting. Mortgage lenders with no overlays will never downgrade a AUS approved file to manual underwriting. If this happens, you can easily transfer to a lender with no overlays. Manual underwriting means a human underwriter thoroughly reviews the file more so than an automated underwriting system file. Emphasis is placed on compensating factors and the lender’s layers of risk. Debt to income ratios and timely payments are important factors in manual underwriting.

What Are Compensating Factors On FHA Manual Underwriting

Included in these compensating factors are the following: cash reserves, verification of rent, longevity at current employer, the income you may have aside from your full-time job, the spouse with income who is not on the mortgage application, and any other positive factors the borrower may have. 

FHA Loan Requirements During Active Chapter 13 Bankruptcy Payment Plan

Borrowers can qualify for an FHA loan during Chapter 13 Bankruptcy repayment plan with trustee approval via manual underwrite. To be eligible, the borrower needs to be in the Chapter 13 repayment plan for at least 12 months with on-time payments. Chapter 13 Bankruptcy does not have to be discharged.

FHA Manual Underwriting Guidelines After Chapter 13 Bankruptcy Repayment Plan

FHA Manual Underwriting Guidelines with regards to Chapter 13 bankruptcy is that for the first 2 years after the discharge date of the bankruptcy is a manual underwriting is required.  Borrowers looking to get a mortgage right after a Chapter 13 discharge don’t have a mandatory waiting period but need to have manual underwriting.

FHA Manual Underwriting Guidelines On Verification of Rent

FHA Manual Underwriting Guidelines require that verification of rent be completed for mortgage applications.  The proper verification of rent is only valid if the borrower can provide 12 months of canceled checks to the mortgage underwriter.  The borrower also needs to make sure that all rent payments were made in a timely manner to show creditworthiness. 

What If I Pay My Landlord Cash And Get Paid Receipt Every Month? 

FHA Manual Underwriting Guidelines also require the landlord to complete a rental form of verification to solidify your story.  The verification of rent form will be provided by the lender for the landlord to complete and sign. Basically, the FHA Manual Underwriting Guidelines are looking to make sure the borrower will not have payment shock when they take on the new loan.  If the borrower has been making monthly rental payments, they are likely to keep making them towards a house they own. Unfortunately, paying the monthly rent in cash does not constitute verification of rent. Needs to be paid with a documented form of payment such as bank wire or canceled check. This holds true even though the landlord gives the tenant a cash-paid receipt and/or letter confirming payment. If the borrower is renting from a home that is being managed by a registered property management company, then a rental verification form completed from the property manager is sufficient and no bank documentation is required. Therefore, paying the rent with cash to a registered licensed property management company is exempt from providing 12 months of canceled checks and/or bank statements showing proof of funds that the rent has been paid on time.

What If I Am Living Rent-Free With Family And Do Not Pay Rent?

What If I Am Living Rent-Free With Family And Do Not Pay Rent?

Loan Consultants will waive rental verification on manual underwrites if the borrower is living rent-free with family to save money for the down payment on a home. Living rent-free with family form will be provided by the lender for the owner of the property to complete and sign. This will waive the verification of rent.  Not too many lenders will waive verification of rent on manual underwrites.

When a Lender Requires Reserves, What Does That Mean?

FHA Manual Underwriting Guidelines with regards to reserves states that the underwriter is going to want to see at least three months of reserves by the borrower.  An example of a one-month reserve would be enough money to cover one month’s principal, interest, taxes, insurance, and HOA fees if applicable. FHA Manual Underwriting Guidelines allow for 100% of down payment funds to be gifted to the borrower however, the reserves cannot be gifted. 

What Counts As Reserves For Lenders

Reserves also don’t need to be liquid cash bank accounts but can include retirement accounts like 401Ks and IRAs. If you aren’t sure how to navigate the waters of the FHA Manual Underwriting Guidelines, then you need to reach out to me ASAP so we can go over exactly how these rules and guidelines affect you as a borrower.  Don’t worry about your bad credit either as we can develop a plan to get you approved and in a new home in no time. 

Can I Qualify For An FHA Loan With Collections Under FHA Manual Underwriting Guidelines?

FHA loans are the best loan program for borrowers with less than perfect credit. Manual underwriting is only allowed on FHA and VA Loans. In the event, that a borrower cannot get an approve/eligible per automated underwriting system and gets a refer/eligible per AUS, then the file can get downgraded to a manual underwrite. There is not much difference between automated versus manual underwriting.

Is Manual Underwriting More Difficult To Get Mortgage Approval Than Automated Approval?

There is no major difference in the degree of difficulty between manual and automated underwriting system approvals.  Yes, the underwriter may scrutinize a file more in detail on manual underwrites. The only difference is manual underwrites have lower debt to income ratio caps than automated approvals. However, the mortgage underwriter has a lot of underwriter discretion on manual underwrites. It can go both ways. The underwriter can be in your favor if he or she sees strong compensating factors or against you if you do not have strong comp factors.  There is more letter of explanations on manual underwrites than automated underwriting system approved files. If you have all of your paperwork in order and provide conditions when asked, manual underwriting is not more difficult than AUS-approved files.

Can I Qualify For An FHA Manual Underwrite With Bad Credit?

HUD Derogatory Manual Underwriting Guidelines state borrowers do not have to pay outstanding collections and charged-off accounts to qualify for FHA loans. In general, manual underwriting requires timely payments in the past 24 months.

Can I Have Recent Late Payments To Qualify For Manual Underwriting?

One or two late payments are not deal killers. At Loan Consultants, we have helped borrowers with late payments in the past 24 months get approved on manual underwriting. A good letter of explanation is required. The loan officer can help borrowers with writing a good letter of explanation on derogatory credit n the past 24 months.

HUD Agency Mortgage Guidelines On AUS Versus Manual Underwriting

There are two different types of lending guidelines. The first and most important is the HUD Agency Guidelines. All lenders need to have their borrowers meet the minimum agency guidelines by HUD. The second guidelines on FHA loans are lender overlays. Overlays are additional lending requirements imposed by the lender.

Are There FHA Lenders With No Overlays

Every lender can have higher lending requirements on FHA loans than the minimum required by HUD. Loan Consultants is one of the few lenders licensed in multiple states with no lender overlays on FHA loans. We just go by the minimum HUD Guidelines and have zero lender overlays. In the following paragraph, we will cover agency guidelines versus typical lender overlays.

What are Examples of Lender Overlays on FHA Loans?

In this paragraph, we will compare and contrast the minimum HUD Agency Guidelines versus typical lender overlays imposed by lenders:

Here are the minimum agency FHA Guidelines versus common lender overlays:

  • The minimum FHA Credit Score Requirement on a 3.5% down payment home purchase loan is 580 FICO
  • Most lenders will have a 620 to 640 FICO credit score requirement as part of their overlays
  • HUD allows borrowers with credit scores under 580 credit scores and down to 500 FICO to qualify for FHA loans with a 10% down payment.
  • Most lenders will not touch any borrowers with under 580 credit scores as part of their lender overlays

FHA Loan Credit Score Requirements

Borrowers can qualify with credit scores under 580 down to 500 FICO:

  • Most lenders will not touch any borrowers with under 580 credit scores as part of their lender overlays
  • Loan Consultants will approve borrowers with 500 FICO as long as they can get an approve/eligible per AUS

Why Do Some Lenders Require Collection Accounts Be Paid Off and HUD Guidelines Says You Do Not Have To?

Outstanding Collections and Charged-Off Accounts do not have to be paid to qualify for an FHA loan per HUD 4000.1 FHA Handbook. All FHA lenders need to meet the minimum HUD guidelines on FHA loans. Lenders with no overlays on FHA loans will just go off the HUD 4000.1 FHA Handbook. However, each individual lender can have higher lending requirements that are above and beyond the minimum HUD guidelines on the 4000.1 FHA handbook. These higher lending requirements of the individual lender are called lender overlays. Lenders can have lender overlays on just about anything. They can demand ZERO outstanding collections and charged-off accounts, higher credit scores, lower debt to income ratios, etc.  Most lenders will require borrowers to pay outstanding collections and/or charged-off accounts as part of the lender overlay policy of their company. However, there are lenders like the team at Loan Consultants that will not have any lender overlays on FHA loans. 

Importance of Compensating Factors on Manual Underwriting

Manual Versus Automated Underwriting System Approval:

  • A lot of lenders will not do manual underwriting
  • Borrowers in the Chapter 13 repayment plan can get approved with a manual underwrite without having their bankruptcy discharged
  • Borrowers with Chapter 13 bankruptcy discharged with less than 2-year seasoning after their discharge date can qualify for FHA loans with manual underwriting.
  • Compensating factors are important on manual underwriting for borrowers with higher debt to income ratios

There are no major differences between manual versus automated underwriting system approvals. The only major differences are with manual underwriting, the debt to income ratios is lower than AUS.

HUD Derogatory Manual Underwriting Guidelines

The key to manual underwriting is timely payments in the past 24 months. One or two late payments in the past 24 months are not viewed favorably by mortgage underwriters. However, one or two late payments in the past 24 months is not always a deal killer. Collections and charged-off accounts that have been aged for at least 24 months are not issues.

The collections and charged-off accounts that have been aged for at least 24 months but recently hit the borrower’s credit reports are allowed.

Qualifying For A Mortgage With A Lender With No Overlays On FHA Loans

Borrowers who need to qualify for an FHA Loan with a manual underwrite, please contact us at Loan Consultants at 844-275-2007. We are available 7 days a week, evenings, weekends, and holidays. Loan Consultants is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans.

Manual Underwriting Mortgage Process

In the following paragraphs, we will be covering the manual underwriting mortgage process.  If you have been following our blogs, you know Loan Consultants are experts in manual underwriting on FHA and VA mortgage loans. We have discussed this topic several times over the years. In this blog, we will detail what to expect during the manual underwriting process. We will also discuss how best to prepare for a mortgage and we will also talk about how to apply for a manually guaranteed mortgage from Loan Consultants.

Understanding The Manual Underwriting Mortgage Process Versus Automated Underwriting 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 Loan Consultants. 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.

Understanding The Difference Between Automated Approval Versus Manual Underwriting

What is a manually underwritten mortgage loan? For a mortgage loan to close (and FUND), you must receive an approve/ eligible Automated Underwriting System report or a refer/ eligible Automated Underwriting System report.

FHA Manual Underwriting Guidelines Checklist On Eligibility Requirements

If you are AUS says approve/eligible, then the underwriter must complete items based on the automated underwriting system “findings” to close the transaction. If the mortgage says refer/eligible, then the underwriter must add a few steps to approve a manually underwritten file. Refer/ eligible findings mean IF the borrower can pass manual underwriting requirements, that transaction can be closed and funded. In the following paragraphs, we will talk about a few manual underwriting requirements for FHA and VA mortgage loans. 

Understanding the Steps of the Manual Underwriting Mortgage Process

FHA manual underwriting requires a couple of 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, 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.

FHA Manual Underwriting Guidelines On 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 a manually underwritten FHA 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 an installment debt

FHA Versus VA Loans Manual Underwriting Guidelines

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 verification with a professional management company.

FHA Residual Income Test

It is also important to understand that if your debt-to-income ratio is above 41% with a manually underwritten VA mortgage. You must pass your residual income qualifications by 120%. For many veterans who receive a fixed income, you may not use the grossed-up income to qualify for residual income. Residual income is based on your actual income figures. 

Understanding The Importance Of Compensating Factors for High Debt To Income Ratios

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.

First-Time Homeowners Counseling Course

First-Time Homeowners Counseling Course

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’s 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 foreclosure, homeownership is next to impossible for the next couple of years. We want to make sure this is a situation you do not have to deal with.

Am I Required to Take a Housing Counseling Course From the Lender?

The only time when a homebuyer is required to take a housing counseling course are for reverse mortgages and/or down payment assistance programs by the DPA provider. Lenders do not require homebuyers to take mandatory housing courses. It is fully optional. 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.

How To Write Letters of Explanations to Mortgage Underwriters

Letters of explanation are going to be requested by mortgage underwriters throughout the mortgage process. Especially more so in manual underwriting files versus automated underwriting system approved borrowers. Do not be alarmed.  Your loan officer should go over the letter of explanation requested from underwriters. It should be concise and short. Do not volunteer any more information than asked. 

Here are some questions underwriters may ask for a letter of explanation or multiple letters, and we listed the answer on how short and concise it is:

Question: Please write a letter of explanation regarding your credit inquiries on the following creditors, ABC credit card, DEF mortgage bankers, GHI Automotive:

  • Answer: I applied for ABC credit card due to lower interest rate and special balance transfer promotion, DEF mortgage bankers pulled my credit because I was shopping for a mortgage, GHI Automotive pulled my credit because I was shopping for a newer car to trade in but decided not to go through with it.

The above questions were answered short, concisely, and to the point. There is no right or wrong answer to the questions from the underwriter. They just want to know that no new credit was obtained which can affect your debt to income ratios.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.

Will Bad Credit, Lower Credit Scores, and Derogatory Tradelines Hurt My Chances of Mortgage Approval?

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.

What Will Mortgage Underwriters Look For On My Payment History On Credit Report 

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.

Does Manual Versus AUS Approval Underwriting Have A Longer Mortgage Process?

Manual underwriting should not take longer than an AUS-approved borrower. Due to additional paperwork and/or verification steps, it may take no more than one week longer. To play it safe, plan on taking five weeks from the time the application is submitted and Loan Estimate is disclosed until the clear to close. However, if all paperwork and documents are turned in when requested in a timely manner, it should not take longer than an automated approved file. Applying for a manually underwritten loan with Loan Consultants is the same process as any other mortgage loan. First, contact us at Loan Consultants at 844-275-2007.  Text us for a faster response. After a brief mortgage consultation, we will pair you with a licensed loan officer. From there, you will fill out an online application link and upload the required documentation.

Documents Required to Start The Qualification and Mortgage Pre-Approval Process

Depending on the loan program and what you do for a living, the documentation you send 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.

Shopping For A Home

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 Overlays

During the COVID-19 coronavirus outbreak, most lenders added additional guidelines to their mortgage products. Loan Consultants has not had to add any additional overlays to their mortgage products. During these unprecedented times and low-rate environments, 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 Loan Consultants can be reached seven days a week on 844-275-2007. 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!

In the following paragraphs, we will discuss and cover HUD manual underwriting guidelines on tightening credit standards due to the coronavirus pandemic.

HUD Tightens FHA Loan Requirements During Coronavirus Outbreak Pandemic

This Article Is About HUD Manual Underwriting Requirements On FHA Home Loans With the recent news that HUD will be tightening credit standards for borrowers under 640 FICO, manual underwriting will be becoming more popular. Homebuyers with under 640 FICO with bad credit will find it more difficult in getting an approve/eligible per automated underwriting system (AUS). Borrowers who cannot get an approve/eligible per AUS and gets a refer/eligible can have their FHA Loans downgraded to manual underwriting. HUD Manual Underwriting Requirements is the same as an approve/eligible but the debt to income ratio caps are reduced. HUD Manual Underwriting Requirements maximum debt to income ratio caps is set at 40/50 DTI with two compensating factors. With no compensating factors, HUD Manual Underwriting Requirements on DTI is 31%/43%, with one compensating factor HUD Manual Underwriting Requirements is capped at 37%/47% DTI. In this blog, we will discuss HUD Manual Underwriting Requirements.

Reason For Manual Underwriting

There are times the automated underwriting system does not render an approve/eligible and renders a refer/eligible per AUS. Refer/eligible means that the automated underwriting system cannot render an automated decision and refers it to a human mortgage underwriter. HUD has recently changed its algorithms on automated underwriting systems where they made it more strict for borrowers with under 640 FICO to get an automated underwriting system approval. Alex Carlucci, a senior loan officer at Loan Consultants, does the largest amount of manual underwriting at Loan Consultants. Alex’s production was not affected during the coronavirus outbreak.

Why Are Compensating Factors So Important To Lenders on Manual Underwriting?

Borrowers with higher debt-to-income ratios will need compensating factors.  The maximum debt-to-income ratios allowed on manual underwriting is 40% front end and 50% back end with two compensating factors. With automated underwriting system approvals, borrowers can get AUS Approval with 46.9% front end and 56.9% back end debt to income ratios. Compensating factors are positive strengths borrower has. One month of reserves is required for manual underwriting. Reserves are one month of principal, interest, taxes, insurance (PITI). Three months of reserves on manual underwriting are considered compensating factors. A low payment shock of 5% or less and/or $100 is also considered a compensating factor. Additional income such as part-time income with at least one year of seasoning is another comp factor. Residual income is another comp factor. Residual income is leftover income after borrowers pay all of their outstanding monthly debts including the proposed monthly PITI.


Leave a Reply

Your email address will not be published.