FHA Can Say Yes
To Bad Credit Even
When The Loan Has
Been Denied By The
Automated Underwriting System!

 

MANUAL UNDERWRITING! Turn Downed By The Automated Underwriting System!

Nothing causes more fear to a home buyer or mortgage loan officer than to have to have a manual underwrite of
a mortgage application. Nearly all mortgage programs, FHA, VA, USDA, and Conventional rely on an automated underwriting system referred to as AUS. There are two AUS systems that are used for all mortgage programs except USDA, there is Desktop Underwriter (DU) and Loan Prospector (LP). Both DU and LP are used for FHA mortgage automated underwriting. What happens after DU or LP has said No to your application is very much up to your mortgage lender and their abilities to do more.

WHAT HAPPENS WHEN DU OR LP HAS DENIED YOUR FHA MORTGAGE APPLICATION?

The first thing that should happen is that the Mortgage Loan Officer should insure that every bit of information put into the AUS is accurate. Run different scenarios to see how you may be able to be approved, because a little tweaking may get you approved and then we can discuss making that tweak happen. There is an old saying in computer coding, 'Garbage in Garbage Out' this applies to AUS underwriting as well, always make sure that you and your application information are well represented BEFORE inputted into the AUS.

Is it over just because you did not get an approval from the automated underwriting system? It is over with many lenders because of their own placed overlays and/or because they cannot or will not conduct a manual underwriting of your application.

There’s a thing called investor overlays, which are adjustments to guidelines and/or pricing created in favor of the lender. This is precisely why one lender can do a loan for someone with bad credit and minimal (or no) down payment, and another lender cannot do the loan in some instances.

Overlays further protect lenders against potential future losses from the home loans they originate, preserving profit margins and buyback risk (an event in which the originating lender is forced to buy back from the investor if the loan they made was not fully documented). Investor overlays tighten the screws on borrowers’ ability to borrow. Put another way, it shifts risk — which translates to cost — on to the consumer by means of limiting the ability to borrow via higher loan fees, reduced purchase price, or lower debt ratio, to name a few.

Note: The key is to work with a lender whose overlays are minimal or non-existent


WHAT IS A FHA MANUAL UNDERWRITE?

With manual underwriting, human beings called Underwriters evaluate the file instead of computers. If your mortgage application approved under the black and white guidelines of the automated underwriting, an Underwriter could make certain exceptions because of specific compensating factors. Fortunately, one of the beauties of an FHA loan is the process of manual underwriting and compensating factors. For potential borrowers and those interested in FHA home loans, understanding how compensating factors work will give you the edge you need if your loan is on the borderline of an approval or denial.

To learn more about compensating factors and how they will help you CLICK HERE, you will be taken to another page of my website. This is highly important information and could make a difference in getting you approved to purchase your next new home.

THERE IS A FORMULA TO GETTING A MANUAL UNDERWRITE APPROVED!

The formula looks daunting but that is why you have a mortgage lender like me working for you. I do this every day and can help you through this all. For the most part this is a check list for different credit score scenarios, find your credit score and it will tell you exactly what we need to get an approval for a manual underwrite. It is really that easy!

Credit History requirements:

The underwriter must evaluate the Borrower's payment histories in the following order:

(1) Previous housing expenses and related expenses, including utilities; (2) installment debts; and (3) revolving accounts.

_ 0x30 on all housing and installment debt payments for the previous 12 months with no more than 2X30 in previous 24 months

_ No major derogatory credit on revolving in the previous 12 months. Major derogatory is defined as any payment 1x90 days late or 3 x 60 days late.

A File that fails the above guides may only be approved by a DE underwriter if the file is documented that it was the result of extenuating circumstances.

Credit Approval requirements for manual underwriting:

_ 12 months cancelled checks must be obtained for rental history IF the borrower is renting from a relative

_ Rent free files must contain a letter from the property owner where the borrower has been residing rent free

_ Mortgage Modification payment histories must utilize the time period in the modification to determine housing lates.

_ Collections or charge offs of a loan or debt in the borrower’s name must be documented with a LOX and supporting documentation that is consistent with the file for each account

_ Disputed accounts that are charge offs, collection accounts or have lates in the prior 12 months must be documented with a LOX and documentation supporting the dispute (medical are excluded from guidance)

_ Non-Medical collections totally $2,000 or more aggregate must utilize a 5% payment of all outstanding balances in qualifying if not paid or in current payment arrangement

_ Charge offs are written off debt and not considered

_ The following wait periods must have elapsed prior to case number assignment

o Foreclosure, Short sale or a Deed in Lieu must be outside 3 years (the date the property is transferred is the date utilized)

o Chapter 7 discharge must be at least 2 years from discharge date

o Chapter 13 or CCC must have at least 12 months elapsed under payment plan terms

Non-traditional Credit:

_ Three credit references should be obtained to establish a credit history with at least one being from the following if not all three: Rent, telephone, utilities

_ Secondary trade lines may include: insurance, child care, tuition, store cards, rent to own, medical bills, auto lease, personal loan payments, saving deposits made on a regular basis

Employment:

_ 1003 must reflect a total of 2 years of work and or schooling history. A shorter period is ineligible for FHA insurance

_ Gaps in employment of 6 months or more require an LOX and the borrower must be on their current job for at least 6 months in order for income to be considered AND a 2-year history prior to job gap must be provided

Reserves (must be own funds, cannot be a gift):

 

_ 1-2 unit properties require a minimum of one month’s PITI in reserves

_ 3-4 unit properties require a minimum of 3 months PITI in reserves 

 

Debt to income Ratios:

_ 500-579 (and No score) credit score max DTI is 31/43

_ 580 and above max DTI is 31/43 with no comp factors

_ 580 and above max DTI is 37/47 with one comp factor

_ 580 and above max DTI is 40/40 with no discretionary debt

_ 580 and above max DTI is 40/50 with two comp factors 

 

Loan to Values:

_ Credit scores equal to or greater than 580 are eligible for maximum financing of 96.5%

_ Credit scores between 500-579 are limited to a maximum LTV of 90%

Maximum qualifying ratios for manually underwritten loans are determined according to the lowest minimum decision credit score and compensating factors.

Lowest Minimum Decision Credit Score 500 -­579 or No Credit Score: 31/43

(Energy Efficient Homes may have stretch ratios of 33/45)

Lowest Minimum Decision Credit Score 580 and above:

1. 31/43 (Energy Efficient Homes may have stretch ratios of 33/45 

 

2. 37/47  ­ Requires 1 of the following Compensating Factors:

Verified/documented cash reserves equal to or exceeding 3 (1­2 units) or 6 (3­4 units) total monthly mortgage payments.

Minimal Increase in Housing Payment

­ New total monthly mortgage payment doesnt exceed current total monthly housing payment by more than $100 or 5% (whichever is less); ..... and

­ There is a documented 12 month housing payment history with no more than one 30 day late payment. In cash­out transactions all payments on the mortgage being refinanced were made within the month due for the previous 12 months.

­ May not be used as a compensating factor if the borrower has no current housing payment.

Residual income 

 

3. 40/40 ­ No Discretionary Debt:

The borrowers housing payment is the only open account with an outstanding balance not paid off monthly;…. and

The credit report shows established credit lines in the borrowers name open for at least 6 months;....and

The borrower can document these accounts have been paid off in full monthly for at least the past 6 months. 

 

4. 40/50 Requires 2 of the following Compensating Factors:

Verified/documented cash reserves equal to or exceeding 3 (1-­2 units) or 6 (3-­4 units) total monthly mortgage payments.

Minimal Increase in Housing Payment

­ New total monthly mortgage payment doesnt exceed current total monthly housing payment by more than $100 or 5% (whichever is less);.....and

­ There is a documented 12 month housing payment history with no more than one 30 day late payment. In cash­out transactions all payments on the mortgage being refinanced were made within the month due for the previous 12 months.

­ May not be used as a compensating factor if the borrower has no current housing payment.

Significant Additional Income (Overtime, Bonuses, Part­Time or Seasonal Employment) Not Reflected in

Effective Income

­ Received for at least 1 year, and will likely continue; ...... and

­ If it were included in gross effective income, is sufficient to reduce the qualifying ratios to not more than 37/47.

Residual income

Does it seem like TOO much? It isn't, not when you have Bob Rutledge on your team helping you through all the stuff. Working together we will get you into your next new home, you just have to do your homework.​

Hi, I am Bob Rutledge with New American Funding a progressive and customer oriented Mortgage Company. I have been a Mortgage Loan Officer for over 2 Decades, I have closed 1000s of mortgage, I have experience as a Mortgage Underwriter too.  I specialize in First Time Home Buyer Programs, Renovation and Construction Mortgages, and knowing the best mortgage options, programs and guidelines to provide the best to my clients.  I concentrate on making more options available to home buyers! When we work together you will find that I answer all questions, sometimes before they are asked. I prefer to be available to you as much as my family and life will allow, I am accessible to you via my cell, text, or email, or you can come and visit at my office. You will never wonder if I left you. 


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Bob Rutledge Mortgage

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New American Funding 12321 Olive Blvd, ste 150
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