FHA Manual Underwriting Guidelines For FHA Loans
In this guide on FHA manual underwriting, we will cover the manual underwriting guidelines on FHA loans and the eligibility requirements. FHA Manual Underwriting Guidelines apply for borrowers who cannot get approve/eligible per AUS. Borrowers who get referred/eligible per Automated Underwriting System may be able to qualify for manual underwriting.
What Does Refer/Eligible per AUS Mean in Mortgages?
Refer/Eligible per AUS means that the automated system cannot render automated approval and approve/eligible per DU FINDINGS but may be eligible to qualify for an FHA loan if it is underwritten by a human mortgage underwriter. Only FHA and VA loans allow for manual underwriting. Conventional loans cannot be manually underwritten. The mortgage underwriter has a lot of underwriter discretion on manual underwriting files. The key to getting approved on manual underwrites is timely payments in the past 24 months
What Does Manual Underwriting Mean?
FHA Manual Underwriting means that a mortgage underwriter will manually underwrite the FHA mortgage loan application. FHA and VA Loans are the only two loan programs that allow manual underwrite. FHA and VA have similar agency mortgage guidelines on manual underwriting. Careful scrutiny is placed on all manual underwriting of home loans. The mortgage underwriter has a lot of power and discretion on manual underwrites. The risk level is higher for the lender on all manual underwrites versus AUS-approved findings.
What Do Mortgage Underwriters Analyze in Manual Underwriting?
On manual underwriting, the mortgage underwriter carefully reviews the following information
- borrowers income
- assets
- liabilities
- credit
- credit scores
- credit history
The ability to repay the new housing payment is always in the back of the mortgage underwriter’s mind. Underwriters will look for compensating factors the borrower has to offset the layered risk on manual underwrites.
How Mortgage Underwriters Analyze Derogatory Credit Tradelines
Mortgage underwriters will question derogatory credit information, public records, debt to income ratios, and look for compensating factors. Compensating Factors are positive factors borrowers have to offset bad credit or less than perfect financial profile. Examples of compensating factors are the following:
- reserves
- longevity on the job
- verification of rent
- income such as part-time income that is not used as qualifying income
- spouse with income but not on the mortgage loan
- larger down payment
- other positive factors the borrower has
- All FHA Loans during and right after Chapter 13 Bankruptcy discharge are all manual underwriting
- This is because the automated underwriting system does not render an automated approval until at least two years have passed from the Chapter 13 Bankruptcy discharged date
Home Buyers can qualify with no waiting period for an FHA loan after the Chapter 13 Bankruptcy discharged date without any waiting period with a manual underwrite.
Eligibility Of FHA Manual Underwriting
To be eligible for FHA Manual Underwriting, borrowers need timely payments in the past 12 months. FHA Manual Underwriting Guidelines On Verification Of Rent, VOR is required on manual underwrites.
FHA Manual Underwriting Guidelines will require borrowers to have verification of rent. Verification Of Rent is only valid if borrowers can provide 12 months of canceled checks and/or 12 months of bank statements to the underwriter. Borrowers need to have been timely with all rental payments for the past 12 months. No 30-day late payments with any rental payments.
If the borrower has paid their rental payments online, then 12 months of bank statements will be required to validate the verification of rent showing the exact rent payment leaving the bank account. The landlord also needs to complete a form of rental verification. VOR Form will be provided by the mortgage lender. If a borrower is living rent-free with a family member and does not have rental verification, we will exempt the verification of rent requirement.
Check if you’re eligible for an FHA Manual Underwriting Loan.
What Is Payment Shock
The importance of verification of rent is due to determine payment shock. Payment Shock is the proposed new mortgage payment a home buyer will have compared to the monthly rental payments they have been paying. If the renter has been paying $1,000 per month in rent and the new P.I.T.I. ( principal, interest, taxes, insurance ) is $1,000, there is zero payment shock. This is because the new mortgage payment is the same as the rental payment the borrower has been paying.
Low Payment Shock Is Considered Compensating Factor
Per FHA manual underwriting guidelines, low payment shock is a strong compensating factor. If the new proposed housing payment will be $1,200 per month and the old rental payments were $1,000 per month, then the home buyer will have a $200 payment shock or 20%. If the home buyer has been renting and has been paying timely rental payments but was paying with cash, that will not count as verification of rent.
Renters should always pay their rental payments with checks or online to show documentation. For renters renting from a property management company, then bank statements and canceled checks are not required. A verification of rent form which is provided by the lender and completed and signed by the property management company manager will be sufficient in lieu of 12 months of canceled checks and/or bank statements.
FHA Manual Underwriting Guidelines On Reserves
Per FHA manual underwriting guidelines, one month of reserves is required on single-family homes on manual underwrites. On manual underwriting, the mortgage underwriter will most likely want to see three months of reserves by the mortgage loan borrower. One month’s reserves are equivalent to one month’s of P.I.T.I., which is principal, interest, taxes, and insurance as well as HOA fees if applicable.
HUD allows 100% gifted funds for the down payment and closing costs on a home purchase. However, reserves cannot be gifted and need to be the borrower’s own funds. Reserves do not have to be liquid cash in bank accounts. Retirement and investment accounts can be used for reserves. Asset accounts such as IRAs, 401k, and securities investment accounts can be used for reserves.
Best Mortgage Lenders For Manual Underwrite With No Overlays
Home Buyers in need of an aggressive mortgage lender with no mortgage overlays on government and conventional loans and specializing in manual underwriting, please do not hesitate to contact us at (800) 900-8569 or text us for a faster response. You can also email us at alex@gustancho.com. We are specialists in both VA and FHA manual underwriting guidelines. We help many folks who have just recently gotten a Chapter 13 Bankruptcy discharge without any waiting period after the discharge date.
Frequently Asked Questions (FAQs)
- Q: What are FHA Manual Underwriting Guidelines?
A: FHA Manual Underwriting Guidelines are rules set by the Federal Housing Administration (FHA) for assessing mortgage applications that cannot be approved through automated underwriting systems. - Q: When are FHA Manual Underwriting Guidelines used?
A: FHA Manual Underwriting Guidelines are utilized when a borrower’s application does not meet the criteria for automated approval or when there are unique circumstances that require manual review. - Q: What are some reasons an application might require manual underwriting?
A: Reasons for manual underwriting can include low credit scores, insufficient credit history, high debt-to-income ratios, or extenuating circumstances such as previous bankruptcy or foreclosure. - Q: What documentation is needed for FHA manual underwriting?
A: Documentation typically includes detailed explanations of credit issues, letters of explanation for derogatory credit, proof of timely rental payments, and additional verification of income and assets. - Q: How does manual underwriting differ from automated underwriting?
A: Automated underwriting relies on computer algorithms to evaluate loan applications based on preset criteria, while manual underwriting involves human review and allows for more flexibility in assessing borrower qualifications. - Q: Can borrowers with low credit scores or past credit issues still qualify for FHA loans through manual underwriting?
A: Yes, borrowers with credit challenges may still be eligible for FHA loans through manual underwriting if they can demonstrate compensating factors such as a stable employment history, substantial savings, or a low debt-to-income ratio. - Q: Are there additional requirements for FHA manual underwriting?
A: Yes, FHA manual underwriting may require additional documentation and scrutiny of the borrower’s financial situation compared to automated underwriting, but it can provide a pathway to homeownership for borrowers who may not qualify otherwise. - Q: How long does the FHA manual underwriting process take?
A: The timeframe for FHA manual underwriting can vary depending on the complexity of the borrower’s situation and the volume of applications being processed, but it generally takes longer than automated underwriting.
This guide on FHA manual underwriting guidelines was updated on February 07, 2024.
