HUD Manual Underwriting Guidelines For FHA Home Loans
This article will cover and discuss the HUD manual underwriting guidelines on FHA home loans. FHA and VA loans are the only two mortgage loan programs that accept manual underwrites. Other mortgage loan programs, traditional and non-prime loans, require the Chapter 13 Bankruptcy to be discharged before they will approve a mortgage loan for borrowers.
Borrowers can qualify for an FHA or VA loan while in a Chapter 13 Bankruptcy repayment plan after making 12 timely payments with trustee approval.
On May 18, 2019, the Housing and Urban Development (HUD) changed its automated underwriting system parameters and HUD Manual Underwriting Mortgage Process. FHA mortgages with higher debt-to-income ratios and lower credit scores are now not receiving approved eligible AUS findings as often. In the following sections, we will cover manual underwriting guidelines for borrowers who cannot get an approve/eligible per automated underwriting system.
Changes in Manual Underwriting Guidelines For FHA Loans
Since trends in the data show these loans to be higher risk, the automated underwriting system algorithm now requires more manual underwriting. Do not let this scare you. The Mortgage Lenders For Bad Credit, Inc. team are experts in manual underwriting. John Strange, a licensed loan officer at Mortgage Lenders For Bad Credit, said the following:
Effective immediately, it will be more difficult to get an automated underwriting system approval if your credit scores are under 640 on FHA Loans. HUD Manual Underwriting Mortgage Process Updates are taking effect immediately. While the exact reasons for the change are unclear, it seems to support evidence that higher debt-to-income ratio mortgages are not performing like once.
This is our specialty. Most lenders have extra lender overlays that prevent them from successfully manually underwriting loans. In this blog, we will detail the changes announced the last month and review some basics of the HUD Manual Underwriting Mortgage Process.
FHA Loans With Low Credit Scores
Of course, a lower credit score equals higher risk; the default data in FHA mortgages are behind the change. This new HUD Manual Underwriting Mortgage Process rule only affects mortgages with credit scores below 640. HUD, the parent of FHA, has the minimum credit score guidelines set at 500 FICO. The key to getting an approve/eligible per AUS is to have timely payments in the past 12 months:
Borrowers with late payments in the past 12 months can get an automated underwriting system approval if they put in a larger down payment. HUD is very lenient in its algorithm for Automated Underwriting System for borrowers with recent late payments who put a larger down payment.
To qualify for an FHA loan with a 3.5% down payment, you need a 580 FICO. Borrowers with credit scores under 580 and down to a 500 FICO require a 10% down payment. However, to be eligible for manual underwrites, you must have timely payments for the past 24 months. Borrowers without timely payments in the past 12 months need to get an approve/eligible per AUS.
FHA Loans With Under 580 FICO Guidelines
If your credit score falls below 580 FICO, HUD requires a 10% down payment. The minimum credit score borrowers can qualify for an FHA loan is 500 FICO. As long as the borrower meets all HUD agency guidelines with no late payments in the past 12 months and has a 10% down payment, the borrower should get approve/eligible per AUS. Please see HUD’s webpage for more information on FHA TOTAL SCORECARD (technology open to approved lenders).
HUD Manual Underwriting Guidelines FHA Total Scorecard
FHA and VA loans are the only two mortgage loan programs that allow manual underwriting. USDA loans allow manual underwriting with GUS. USDA loans have a two-step underwriting system, unlike other mortgage loan programs. USDA loans have a two-step mortgage underwriting process. Marga Jurilla, a Mortgage Lenders For Bad Credit loan officer, explains the underwriting process of USDA loans.
The mortgage lender underwrites the borrower first. After the mortgage underwriter of the lender issues approval, the file goes to the USDA mortgage underwriter.
FHA Total Scorecard is analyzed through DU or LP and is not an AUS. The TOTAL SCORECARD will have either an “accept” or “refer” classification. If you get an “accept,” your file indicates the FHA will insure your loan without a manual underwriting review.
How Does Manual Underwriting Work?
HUD manual underwriting has very cut-and-dry debt-to-income requirements and payment history requirements. If your loan requires a manual underwrite, your payment history will be combed through for the past 24 months. The only late payment in the past 24 months that may or can potentially be acceptable is out of the ordinary medical condition.
After HUD tweaked the algorithm on March 18th, 2019. More borrowers will receive a “Refer: classification, which DOES require a manual underwriting certification by an FHA Direct Endorsement (DE) Underwriter.
A housing late payment is the worst type of late payment you can have on your credit report if you are applying for a mortgage. You can have late payments, collections, charge-offs, and other derogatory but not recent late payments. You may not have any housing or installment late payments within the past 12 months.
HUD Manual Underwriting Guidelines on Late Payments
Borrowers can have no more than two 30-day late payments within the past 24 months. Meaning between months 13 and 24, you can have two 30-day late payments. FHA manual underwriting will also require no more than 260-day late payments on any revolving debt, and you may not be more than 90 days late during the past 12 months
See the chart below:
A quick side note for mortgages that are modified with late payments. The mortgage company may ignore all late payments before the modification. During a manual underwrite, the underwriter is only concerned with payment history since the loan was modified. You must be able to document at least 12 on-time payments to your modified mortgage before you are eligible to apply for a new FHA mortgage loan.
HUD Manual Underwriting Guidelines on Debt-To-Income Ratio
For credit scores below 580 or NO CREDIT SCORE reporting, the max debt-to-income requirements are 31% / 43%. Even with compensating factors, you cannot go over these thresholds. For credit scores above 580, debt-to-income ratio requirements can vary. With more compensating factors, you may go to a higher debt-to-income ratio threshold.
Compensating factors are positive factors of the borrower which offsets the layered risks of the mortgage lender. Compensating factors will offset a borrower’s debt-to-income ratio. There is a list of positive factors that can be used as compensating factors on manual underwrites.
Mortgage underwriters have a lot of power in manual underwrites. An underwriter has a lot of underwriter’s discretion on manual underwrites. The underwriter can exceed the recommended debt-to-income parameters on manual underwrites if the underwriter sees strong residual icnme and compensating factors. If you do not have any compensating factors, your debt-to-income ratio requirement is maxed at 31% / 43%. You may go up to 37% / 47% if you have ONE compensation factor. You may go up to 40% /50% with TWO compensation factors.
See the chart below for more specifics.
HUD Manual Underwriting Guidelines on Acceptable Compensating Factors
Verified and documented cash Reserves (1-2 unit home requires reserves of 3 months PITI, 3-4 unit homes require reserves of 6 months PITI)
- Minimal increase in housing payment
- Low payment shock
- Residual income
- Longevity on job
- History of saving money
- Three months of reserves
- non-borrowing spouse with qualified income
- Second job, part-time job, other income not used to qualify for a mortgage
Verifying Non-Housing Expenses on Non-Traditional Credit For No Credit Scores
Not having a credit score can be frustrating when seeking a mortgage. Luckily, HUD guidelines allow borrowers to receive FHA financing without a credit score. You only need a 3.5% down payment. You do need to use NON-TRADITIONAL CREDIT References to build tradelines. You must verify housing expenses such as rental payments or utility company bills (phone, gas, electric, water, cable, internet) for at least the past 12 months.
Borrowers without a credit score can qualify for an FHA loan using non-traditional credit. Non-traditiional credit are credit tradelines that do not report on credit reports. Borrowers without credit scores need to go through a manual underwrite with non-traditional credit.
You must also verify non-housing expenses. You must verify at least two forms of non-housing bills. Examples could be; insurance premiums, not payroll deducted, School tuition or child care expenses, rent-to-own payments on furniture or appliances, medical payments not covered by insurance and automobile payments. Your payment history on these bills will allow the underwriter to decide on your loan.
HUD Manual Underwriting Guidelines Versus Overlays on FHA Loans
Mortgage Lenders For Bad Credit, Inc. has no LENDER OVERLAYS for FHA mortgages. Since we do so many manual underwritten loans, we know what to ask for upfront, saving you time and headaches. Borrowers who need a manual underwrite check the lender and loan officer. Not all lenders will be able to do manual underwrites. Not all mortgage loan officers are experienced in manual underwrites.
Most borrowers make a mistake when they require a manual underwrite by selecting the wrong lender. It is important to use a lender who specializes in manual underwriting. Most Wonders have LENDER OVERLAYS that prevent them from successfully closing mortgages requiring a manual underwrite.
It is important to have strong letters of explanation for any derogatory items on your credit report, decreases and income, and non-sufficient funds on bank statements. Adding these letters of explanation upfront will save the underwriter from asking additional questions. It is important to be as thorough as possible when sourcing large deposits and or gift funds.
Documents Required For Mortgage Process
All pages of the bank statements must be present. Another common mistake happens when completing the verification of rent. If you rent from a private landlord, we need 12 months of canceled rent checks to verify your on-time payments. For more information on the AUS change on FHA mortgages, see HUD’s Bulletin from March 14th, 2019.
We Are Lenders and Not a Lead Generation Company
If you have any questions about the content of this mortgage guide or if you need to get qualified and approved for a government, conventional, or non-prime loan, please contact us at Mortgage Lenders For Bad Credit at 800-900-8569. Text us for a faster response. Or email us at gcho@gustancho.com.
The team at Mortgage Lenders For Bad Credit has a national reputation for being able to do mortgage loans other lenders cannot do. Over 80% of our borrowers are folks who could not qualify at other lenders due to lender overlays or because the lender did not have the best mortgage loan options for the borrower.
The Mortgage Lenders For Bad Credit team are experts in FHA mortgage guidelines. The support, operations, and licensed personnel is available seven days a week to answer any questions. Mortgage Lenders For Bad Credit are the leaders in manual underwriting. Please call us for more information and a free rate quote.
