FHA Manual Underwriting Guidelines

[Gustan]

Manual underwriting on FHA loans refers to the process of assessing a borrower’s creditworthiness and financial situation without solely relying on automated systems or standard credit scores. This approach is typically used when borrowers have non-traditional credit histories, lower credit scores, or other factors that may not meet the automated underwriting guidelines set by the Federal Housing Administration (FHA).

Here’s how manual underwriting on FHA loans generally works:

Documentation: Borrowers are required to provide extensive documentation of their income, assets, debts, and expenses. This may include pay stubs, tax returns, bank statements, and proof of any other sources of income.

Credit Analysis: Instead of relying solely on credit scores, manual underwriters assess the borrower’s credit history in more detail. They may consider factors such as payment history on rent, utilities, and other recurring expenses, as well as explanations for any derogatory credit events.

Compensating Factors: Manual underwriters may look for compensating factors that offset weaknesses in the borrower’s application. These could include a history of timely rental payments, significant cash reserves, or stable employment.

Debt-to-Income Ratio (DTI): Manual underwriting also involves a thorough analysis of the borrower’s debt-to-income ratio. While FHA guidelines typically allow for higher DTI ratios compared to conventional loans, manual underwriters may scrutinize this ratio more closely.

Approval Process: Once all documentation is reviewed and the underwriter has assessed the borrower’s financial situation, a decision is made regarding loan approval. If approved, the loan may come with conditions or additional requirements.

Manual underwriting can provide opportunities for borrowers who may not qualify through automated systems but have sufficient financial stability to repay the loan. However, it also requires more time and effort from both the borrower and the lender due to the detailed documentation and analysis involved. Additionally, not all lenders offer manual underwriting for FHA loans, so borrowers may need to seek out lenders who specialize in this process.

[Lilly]

FHA and VA loans are the only mortgage loan programs available for manual underwriting.