FHA Manual Underwriting & VA Manual Underwriting Guidelines
Are you looking for FHA manual underwriting or VA manual underwriting guidelines? Not all lenders are willing to manually underwrite government loans due to mortgage lender overlays. There are factors that can trigger a loan to be manually underwritten or the risk can exceed the threshold for an Automated Underwriting System approval.
Fannie Mae’s Automated Underwriting System
Fannie Mae’s Desktop Underwriter determines whether a loan meets eligibility requirements by providing lenders a credit risk assessment. This program determines the risk of the loan.
The Automated Underwriting Systems findings are labeled:
- Accept or approve eligible.
- Accept or approve ineligible.
- Refer with caution.
- Out of scope recommendations.
- Or refer eligible or ineligible.
Manually underwritten loans must have a refer eligible recommendation and an underwriter must determine if all guidelines are met.
Another Automated Underwriting System
Some Loan Originators will also try and run Freddie Mac’s Loan Prospector during the pre-approval process. Loan Originators that have access to both can increase the odds of an approval. This is another tool that determines risk assessment with your criteria for eligibility requirements.
Every borrower’s situation is different and unique, but both VA and FHA loans can be manually underwritten when they meet specific requirements. There are factors that trigger a loan to manually be underwritten.
7 Factors that Trigger a Manually Underwritten Loan
Loans that do not meet an Automated Underwriting System Approval require a thorough review by an underwriter to determine if the case is eligible for financing.
1.) Non-traditional Credit
When you are trying to qualify for a loan and cannot demonstrate sufficient credit references on a credit report, non-traditional credit may be used. The credit references should have a minimum of 12 months history. Some examples on non-traditional credit include: rental/housing payments, cell phone, utilities, insurance, and others.
2.) Debt-to-income Being too High
There two debt-to-income ratios that play a factor in being eligible for financing is the front-end ratio and back-end.
- (Total monthly housing expense ÷ gross monthly income) = front-end ratio.
The total monthly housing expense will include principal, interest, property taxes homeowner’s insurance, homeowner’s association fees or dues, and mortgage insurance.
- (Total monthly debt payment ÷ gross monthly income) = back end-ratio
The total monthly debt payment will include the total monthly housing expense plus monthly debt obligation. Some examples of monthly debt obligations, but not limited to are student loans, credit cards, car loans, child support, and federal income tax installment agreements.
3.) Credit Scores Being too Low or Thin Credit
In some cases, you may have to prove you have re-established credit when past adverse credit is present. Thin credit is not having enough credit or no history. The credit bureaus, Equifax, Experian, and Transunion, may even not report a score at all because it is impossible to generate a score based on the lack of data.
4.) Recent Attempts to Obtain New Credit
Recent attempts to obtain new credit can be frowned upon and trigger a loan to be denied or have to be manually underwritten. Opening new accounts can negatively impact a credit score, but there are benefits over time that may increase the score. There is a balance that should be considered on how many accounts are beneficial to credit, the payment history, and utilization of credit.
5.) Payment History
Recent late payments can cause issues when it comes to getting an approval for a loan. The older the lates, the better chances are for an approval. A lender may often view recent lates as someone is going through financial hardship.
6.) Number and Age of Accounts
Older established credit account indicate a lower risk to the Automated Underwriting System. Too many accounts or too many new accounts may signal that someone may have overextended themselves and trigger a loan to require to be manually undewritten.
7.) High Credit Utilization
Other factors can trigger a manually underwritten loan, but most have to do with credit reputation. Your credit history is used as an indicator for future performance. A letter of explanation is required and will be considered in the underwriting analysis.
VA Manual Underwriting Guideline Basics
It is hard to tell if you qualify without running an Automated Underwriting System due to many factors that can trigger an approval. Some lenders have tougher guidelines like debt-to-income caps, higher credit standards, or just do not have the resources to manually underwrite a VA loan. Some VA manual underwriting guideline basics:
- The max debt-to-income is 41% with no compensating factors.
- Compensating factors help when approving higher debt-to-income ratios.
- The past 12 month housing/payment history will be verified through a Verification of Rents (VOR) or cancelled checks.
- Credit reputation is one of the biggest factors when it comes to refer findings.
FHA Key Factors
The risk assessment for the Automated Underwriting System (AUS) is determined during the pre-approval process. Some lenders have a tougher a mortgage process than other due to requiring higher credit standards. Some key factors include:
- Verification of rent or canceled checks for the most recent 12 month period for the most current housing obligation.
- You should have three trade lines with 12 months ratings and include manually rated trade lines (utilities, cell phone, and others) when necessary for a manually underwritten loan.
- Manually underwritten mortgages require timely payments in the past 12 months and cannot have more than two 30 day late mortgage or installment payments in the previous 24 months.
- Payment shock is a factor for a manually underwritten loan.
FHA Managing Risk and Fulling Their Mission
Effective March 18, 2019, FHA updated their requirements to manage the risks for high debt-to-income rations and low credit score combinations. They came up with these changes to find the right balance to support the American dream of home ownership.
- For credit scores below 620 FICO and when debt-to-income ratios exceed 43%, an FHA loan must be manually underwritten.
The new mortgagee letter supersedes an prior FHA manual underwriting guidelines. Depending on credit scores and acceptable compensating factors, the maximum qualifying ratios will vary. The down payment for a FHA loan always is determined by your credit score regardless of an automated underwriting approval or manual underwrite.
Down Payment for FHA Manually Underwritten Loans
If you have a 580 FICO credit score or higher, the FHA minimum down payment is 3.5%.
If the borrower’s credit score is under 580 FICO credit score:
- Limited to maximum loan-to-value of 90%.
FHA Reserve Requirements
Reserve requirements depend on the number of units and the underwriting findings. For a manually underwritten loan:
- One month of reserves is required for a 1-2 unit property.
- Three months required for a FHA 3-4 unit property.
VA Foreclosure and Bankruptcy Seasoning Requirements
VA seasoning requirements for foreclosure and bankruptcy:
- Foreclosure, deed in lieu of foreclosure, and short sale must be dated greater than 2 years of trustee’s deed.
- Chapter 7 bankruptcy discharged for 2 years.
- Chapter 13 bankruptcy requires 12 month satisfactory pay history and court permission.
- No waiting period after Chapter 13 bankruptcy discharge date.
Seasoning for Bankruptcy and Foreclosures for FHA Mortgages
FHA foreclosure and bankruptcy seasoning requirements:
There is a two year waiting period after Chapter 7 bankruptcy. There is no waiting period after a Chapter 13 bankruptcy discharge, but requires manual underwriting. A manual underwrite is required during a Chapter 13 and must include:
- 12 month satisfactory payments have been made to the trustee.
- Trustees approval.
There is a three year waiting period after a foreclosure.
Loan Program With No Seasoning Requirements
Non-traditional loans allow for financing on purchases, rate and term and cash out refinances. The down-payment or maximum loan-to-value will depend on the recent derogatory events and when they occurred or were settled:
- Chapter 7 and 11 bankruptcy.
- Chapter 13 discharged.
- Chapter 13 dismissed.
- Chapter 13 open.
- Most recent 12-month mortgage and rental history.
- Foreclosure, short sale, and modification.
It is possible to get a mortgage with no seasoning on a derogatory events.
