There are “universal” underwriting guidelines for Manually Underwritten FHA Mortgage Loans. Meaning, if a mortgage company wants to get FHA to put Mortgage Insurance on a loan, there are certain guidelines that FHA expects the loan to meet.
These guidelines, for Manually Underwritten loans have been in effect for a couple of years, but because FHA just tightened the credit requirements for the AUS system, it’s time to review these guidelines again.
So what is the AUS System? It’s the Automated Underwriting System (the computer system) that is used to initially look at credit, and ratios, and job history (etc) to see if the chances of approval are high. FHA decided in March of 2019 that the Automated approvals for loans with low credit scores and high debt needed to be changed, and these loans really needed to be underwritten by a REAL person, not a machine.
FHA doesn’t make loans, they provide Mortgage Insurance (PMI) for the lender in the event of default. Because they think these more complicated loans need to have some more “common sense” underwriting – they are making a change.
Manually Underwritten FHA Mortgage Loans 2019
The documentation required for approval for Manually Underwritten FHA Mortgage Loans is pretty much the same it always has been, and it varies based upon the Debt to Income Ratios. In our experience, getting a loan with Credit scores BELOW 600 approved is extremely hard. Between 600 and 620 is likely to be a Manually underwritten file, and anything under 640 credit score doesn’t qualify for First Time Home Buyer Grants.
Credit score of 580 and Above, With a Debt to Income Ratio of 31/43 there are No Compensating Factors Required. Energy Efficient Homes (Must be Certified an show as such on the Appraisal) may have stretch ratios of 33/45.
Credit score of 580 and Above, With a Debt to Income Ratio of 37/47 we will need ONE of the following: verified and documented cash Reserves; minimal increase in housing payment; or residual income.
Credit score of 580 and Above, With a Debt to Income Ratio of 40/40 we can have no discretionary debt.
Credit score of 580 and Above, With a Debt to Income Ratio of 40/50 we will need TWO of the following verified and documented cash Reserves; minimal increase in housing payment; significant additional income not reflected in Effective Income; and/or residual income.
Compensating Factors For FHA Mortgage Loans
So the question now becomes – what does it mean when the FHA Handbook says you need Cash Reserves for Manually Underwritten FHA Mortgage Loans? We have to have documented Reserves equal to or that exceed three total mortgage payments.
If your taxes, insurance principal and interest equals $1000 (cause I can do this in my head) you will need $3000 left over after you sign the documents to close the loan and get the keys. This money CAN come in the form of a gift – but in general we are not going to count but about 70% of the value of your IRA accounts.
When FHA Underwriters say that they need to see a minimal increase in housing payments – it means a couple of things. ONE, if you are currently living at home and not paying rent – that’s a problem. Does that mean that we CAN’T do a manual underwrite for folks living at home? No, but you will need to have demonstrated the ability to save during that time.
Also, with minimal increase in housing payments (sometimes called Payment Shock), the new total monthly Mortgage Payment can not exceed the current total monthly housing payment by more than $100 or 5 percent, whichever is less; and we will need a documented 12 month verification that no more than 1 payment has been no more than 30 days late.
One compensating factor for Manually Underwritten FHA Mortgage Loans is No Discretionary Debt. Additionally, the Borrower’s housing payment is the only open account with an outstanding balance that is not paid of monthly. Also, the credit report needs to show established credit lines in the Borrower for at least six months; and the Borrower can document that these accounts have been paid off in full monthly for at least the past six months.
When the FHA Underwriter is requesting that there be Significant Additional Income Not Reflected in Effective Income… they really mean: that there is additional income from Overtime, Bonuses, Part-Time or Seasonal Employment that we can document has been received for at least one year, that it is likely to continue AND that the income, if it were included in gross Effective Income, is sufficient to reduce the qualifying ratios to not more than 37/47.
Residual Income is another Compensating factor that can be used for approvals for Manually Underwritten FHA Mortgage Loans. Residual income is calculated using the net income from all occupying BORROWERS less the following… Your total monthly payment (taxes, insurance, HOA dues, principal and interest (the whole payment); estimated maintenance and utilities; job related expenses (e.g., child care); and the amount of the Gross Up of any Non-Taxable Income (we typically gross up Social Security income).
A little more information about Residual Income. It’s tricky, because FHA says we need to use VA Guidelines to do the numbers and verify the Maintenance and Utilities… those calculations rely on ALL of the folks who will be living in the home who earn money. To think about it – we might be able to make the case that someone is married (for instance) but the spouse is not going to be on the mortgage.
We run into this pretty often when we have someone who is married to a person who has credit scores below those that are needed.
In that case, we might be able to document their income, and use it as a Compensating factor for an approval. Let’s be real clear though, that the person who is applying for the mortgage loan will need to have income sufficient to “ALMOST” qualify on their on.
If you have more questions about Compensating factors and Manually Underwritten FHA Mortgage Loans – please call Steve and Eleanor Thorne, we love helping home buyers move into their Dream Home! 919 649 5058, there’s no cost or obligation for asking us questions, we genuinely want to help you.
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