Manual Underwriting FHA Loans

FHA Home Loan Underwriters in NC consider many different factors to approve your mortgage loan. For the most part though, the two most important things they look at is your credit, specifically your credit score and what your recent credit looks like – and they look at “ratios.” Why is that? Because history tells us that FHA Loan Borrowers who have the right “math” with a certain percentage of their income going to debt – and have decent credit, will be good homeowners!  The good news is that FHA Loans come with “common sense” underwriting, and there are FHA Loan Compensating Factors we can consider.

There are two ratios that we use to qualify someone for a FHA home loan in NC. The first ratio is typically referred to as the “housing” ratio. To calculate that, we take your gross monthly income (so before taxes) and divide the housing expense (meaning home loan payment, insurance, taxes, PMI, Home Owner Association Dues) into your income.

So for easy math, let’s say you make $5000 before taxes a month – ideally, you should not have a total housing expense of more than 28%, or $1400. With the housing ratio, we can go over the “ideal” 28% – however, once you approach 33 or 34% of gross monthly income, the Automated Underwriting System (FHA AUS) starts “kicking” people out.

To calculate the Total Debt to Income Ratios, you would take the total housing payment, and add any monthly debt to it. The debt we count would include car payments, student loans,credit card payments – child care, cell phone bills, health insurance (for example) do not count in that debt “bucket.”

The Maximum Debt to income ratio that receive an Automated Approval (AUS) for FHA Loans when the middle credit score for one of the borrowers is under 640 is 43.000%.   That would mean based upon that $5000 a month gross income, your total monthly debt payments, including the house payment should be no more than $2150. So if you take the $2150 and subtract out our house payment of $1400, in this example you could not have more than $750 in monthly debt.

For everyone who wants a FHA Loan, but is over those ratios, you are looking at a Manual Underwrite.  Manual Underwritten FHA Loans require more documentation, and often have additional requirements based upon the combination of credit score and ratio – meaning someone with a credit score of 600 and a ratio over 43% will have a more difficult time than someone with a credit score of 620 to 639.

Manual Underwriting / FHA Loan Compensating Factors

For folks with ratios that are 31/43 – then FHA does not require the Underwriter to consider additional Compensating Factors.

For Ratios of 37/47 we need to provide one of the following FHA Loan Compensating Factors:

• Verified and documented liquid cash reserves equal to at least three total monthly mortgage payments.
• Prove that the New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and verified and documented twelve month housing payment history.  This is sometimes referred to as “Payment Shock” (with no more than 1 time 30 days late on a housing or rental payment only).
• Sufficient Residual Income as calculated per VA requirements

For Ratios of 40/40 the FHA Loan Underwriter is required to prove that the Borrower with established credit and open credit lines carries no discretionary debt. In this situation, the monthly housing payment is the only debt, there are no “installment loans” (student loans or car payments) and revolving credit is paid off monthly.

For Home Buyers looking for a FHA Loan who have ratios of 40/50, we must provide TWO of the following FHA Loan Compensating Factors:

• Verified and documented liquid cash reserves equal to at least three total monthly mortgage payments.
• New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and verified and documented twelve month housing payment history (with no more than 1 time 30 days late on a housing or rental payment only).
• Sufficient Residual Income as calculated per VA requirements. 
• Verified and documented additional income that is not considered effective income. Overtime and bonus income can be cited as a compensating factor if the mortgagee verifies and documents that the borrower has received this income for at least one year but less than two years, and it will likely continue. Part-time and seasonal income can be cited as a compensating factor if the mortgagee verifies and documents that the borrower has worked the part- time or seasonal job uninterrupted for at least one year but less than two years, and plans to continue.

If you are interested in getting a FHA Loan, remember that FHA is not just for First Time Home Buyers.  The program will allow us have non-owner occupied co-borrowers, they allow grants and gifts from family for the 3.5% down payment.  There are also ways to include Graduate Student Income or Stipends.

If you or someone you know is considering purchasing a home in Raleigh or Cary – or if you have more questions about FHA Loan Compensating Factors, please call Steve and Eleanor Thorne  Government Loan Experts in Raleigh, NC  919-649-5058.  We offer today’s best mortgage rates!