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Manual Underwriting

FHA Manual Underwriting Mortgage Lenders

When the FHA mortgage applicants’ information is entered into what’s called an Automated Underwriting System, or AUS. This is basically a computer program that helps streamline the FHA mortgage application process and lets FHA Approved mortgage lenders know at the outset whether a borrower will meet credit and income requirements. FHA loan applications that receive an Automated Underwriting System approval can allow FHA mortgage lenders to proceed with less paperwork and documentation needs.

FHA Mortgage Lenders Manual Underwriting Requirements

The FHA mortgage lenders  must manually underwrite those applications where:
• TOTAL issues a Refer;
• The application was downgraded to a manual underwrite; or
• FHA programs require manual underwriting for the application.

A mortgage that received an Accept recommendation must be downgraded if:
• The mortgage file contains information or documentation that cannot be entered into, or evaluated by TOTAL Mortgage Scorecard;
• Additional information, not considered in the AUS recommendation affects the overall insurability of the

Accept Risk Classifications Requiring a Downgrade to
Manual Underwriting (cont.)
• The Borrower has $1,000 or more collectively in Disputed
Derogatory Credit Accounts;
• The case number assignment date is within three years of any
of the following events:
– The date of the transfer of title through a Pre-Foreclosure Sale
(Short Sale);
– The date of the transfer of title through a foreclosure sale;
– The date of the transfer of title through a Deed-in-Lieu (DIL) of

The date of the Borrower’s bankruptcy discharge as reflected
on bankruptcy, documents is within two years from the date of
case number assignment;
• The Mortgage Payment history requires a downgrade as
defined in Housing Obligations/Mortgage Payment History;
• The Borrower has undisclosed mortgage debt; or
• Business income shows a greater than 20 percent decline over
the analysis period.

But there are certain circumstances that can shock an application to a Refer/Eligible that requires manual underwriting. Examples include:

  • Foreclosure, short sale or deed-in-lieu of foreclosure
  • A lack of credit depth or No Credit History
  • Bankruptcy in the last 24 months
  • Default or delinquency on federal debt
  • Late mortgage payments

When the FHA loan application that gets bounced from the automated system may be eligible for a manual underwrite. All this basically means is that a human will have to review the file and crunch the numbers and evaluate the risk. In addition, when facing a manual underwrite you will likely need to meet tighter requirements when it comes to things like debt-to-income (DTI) ratio, residual income, derogatory credit, and other financial documentation.

VERY FEW FHA MORTGAGE LENDERS PROVIDE MANUAL UNDERWRITING! Many FHA mortgage applicants ask u what is a “manual underwrite” FHA mortgage approval,  and what is needed to get an FHA manual to underwrite mortgage approved.

It’s important for both borrowers and FHA mortgage lenders to realize what it means when a mortgage loan officer states that a loan requires a “manual underwrite”. Some FHA mortgage lenders don’t completely understand what it means in-depth, so let’s start off with the basic definition of what an FHA manual underwrite actually means when it’s applied for FHA underwriting.

Almost all FHA  mortgage lenders including the local banks you walk into use what is called a “automated underwriting systems” (AUS) to help them accurately underwrite and approve FHA mortgage loans. These software systems were developed by Fannie Mae, Freddie Mac, The automated underwriting systems developed by Fannie and Freddie are used for conventional conforming loan approvals including approvals for  FHA mortgage approvals. So here is the FHA manual underwrite process:

An FHA mortgage lender will upload or enter all the FHA mortgage applicants’ data and reissue a current credit report into the automated underwriting systems and then “submit” the FHA mortgage application to the underwriting systems” (AUS). Within or less than 1 minute the system will provide an answer on your FHA mortgage application. If your FHA mortgage application qualifies or is “ELIGIBLE” the computer system will provide 1 of 3 answers If the loan is “INELIGIBLE” then it can NOT be approved you you will probably need to find another lender like a private or portfolio or hard money lender.  Or the system will result will either state “Approve”, “Accept”, or “Refer”.


  1. “Approve/Eligible”
  2. “Accept/Eligible”
  3. “Refer/Eligible”

Assuming the loan is “Eligible”, then there is a second response that indicates the level of underwriting “scrutiny” required.

3. “Refer/Eligible” is what will spark the lender to need to perform a manual underwrite. Many lenders DO NOT even offer the service of performing manual underwrites because they require additional work and are more prone to audits by Fannie Mae, Freddie Mac, or Ginnie Mae. Many Florida FHA mortgage lenders offer manual underwrites but most of them prefer to only offer this service on government loans (FHA, VA, or USDA). Very few lenders will offer a manual underwrite on a conforming conventional loan. We offer manual under wring approvals.

Now we will go over what is most likely going to be required if your loan is going to be manually underwritten. The “Refer” part of the computer response means that the underwriter must manually review the  “refer” and refer to the FHA mortgage handbook to “manually” make sure it meets all FHA minimum guidelines, which obviously requires more time and analysis. During the review the FHA mortgage application the underwriter is reviewing the Compensating factors.

FHA Mortgage Lenders Compensating Factors


FHA LENDERS USE OF COMPENSATING FACTORS: Compensating factors are simply “good parts that offset the bad parts” in your loan request. Some compensating factors include:

DOWN PAYMENT- For manual underwrite approval lenders love to see that you have skin on the game. For FHA loans, the minimum down payment is typically 3.5%. If you can put down 10% then not only would this be considered a HUGE “compensating factor”, but also there are multiple benefits regarding when you can cancel FHA mortgage insurance if you put down 10%.

PAYMENT SHOCK- For manual underwrite approval lenders love to see your new payment in line with your current rental history. Whether you rent or own right now if you can prove that you’ve been capable of making such a payment on time for the past 12 months AND the new proposed payment is not much larger than your current monthly housing payment, then this is a HUGE compensating factor because it proves that you’ve been capable of handling this payment range over the past 12 months without being late. Here is a trick to “count” this as a compensating factor EVEN IF your new proposed monthly payment will be significantly higher: Take a look at installment loans such as auto loans. If, perhaps, your new housing payment was going to increase from $700 in rent to $1,100 per month for the mortgage and you have a $400 monthly car payment that is almost paid off, then point that out! Essentially, you have proven that between the rent and the vehicle loan, you’ve been paying $1,100 on time each month, and if that vehicle payment only has a few months left then there is no reason that the (now paid off) vehicle shouldn’t allow you to now handle the $400 increase in your housing payment. This is something that often loan officers even forget to analyze and point out.

RENTAL HISTORY-  For manual underwrite approval lenders love to see proof of timely rent payments for the past 12 consecutive months. If you pay by check, then the loan officer will ask for 12 months canceled rent checks (front and back) If you pay by automatic withdrawal then the loan officer will ask for the past 12 monthly bank statements that show the dates of each rent withdrawal. In addition, lenders may even have a 3rd party call the landlord or property management company to verbally verify timely payment history as an extra layer of proof (especially in cases where people pay by check but there are significant lags between the check date and the deposit post date).

RESERVES-  For manual underwrite approval lenders love to see reserves. Reserves is defined as future monthly mortgage payments in your account after closing. money that you’ll have left over after buying or refinancing a home. The best types of reserves are the most liquid (checking, savings, money market accounts). Reserves can also be retirement accounts, stocks, bonds, etc. but you’ll need to prove that you can actually access the money in such accounts (often a 401(k) will have a handbook that stipulates when and how much money any employee can actually withdrawal or borrow from the account– the loan officer will need this handbook if you want to be able to “count” a 401(k) account).

INCOME – For manual underwrite approval lenders love to see Income that can not be “counted” for underwriting purposes. There is typically income that can’t be “counted” for underwriting purposes, but may be considered a “compensating factor”. Examples of such income can include child support or alimony that is received, but not always on time or for the full amount ordered by the judge, non-borrowing spouse income (a spouse that is not on the loan, but has a job), income from a second job (typically you can’t “count” income from a second job unless you’ve had it for at least two years), or self-employed income that has not been received for two years. Use your imagination to come up with additional compensating factors after reading these examples.

Job stability and /or likelihood for future wage increases. Mortgage lenders love it when employees have worked for the same employer for a long time, as they are generally much less likely to be fired or laid off and more likely to receive raises. Additionally, mortgage underwriters actually consider the company and industry that your employer is in. A small independent medical insurance brokerage is less likely to be in business and retain their employees than a company that’s made the Dow 30 index (such as Boing, General Electric, AT&T, etc.).

NON TRADITIONAL CREDIT HISTORY- For manual underwrite approval lenders love to see  “non-traditional” credit accounts to be added to the credit report to show timely payment history for at least 12 months. For no credit score home loan approvals these nontraditional credit histories are r required.  If the borrower has less than three accounts with a 12-month history of timely payments, then many underwriters will require that the borrower document timely payments on other bills. The best types of accounts are “housing-related accounts”, such as utilities, renters insurance, cable TV, internet, etc. Other acceptable accounts can include auto or home insurance payments, mobile phones, storage unit, etc.The idea is to gather more data to determine a given borrower’s willingness/ability to make timely payments. Again, this only applies to borrowers that have very few accounts that show up on their credit reports.

Keep in mind that if you are facing a manual underwrite, it’s usually due to poor credit or a high debt-to-income ratio. Most lenders will want to see a housing ratio (mortgage payment + mortgage insurance + home insurance + property taxes + homeowners association dues on a monthly basis) / (gross monthly income) around 31% and your debt-to-income ratio (“DTI”) at 43% or less (this is the same calculation except your “debt” includes all other payments such as minimum credit card payments, auto loans, personal loans, child support due, etc.). Many lenders that offer manual underwrite loans will not budge on these ratios, but some will. Generally, with compensating factors, you can get a manual underwrite loan approved with a housing ratio of up to 35% and a DTI ratio of up to 48% at the most, and these lenders are tough to find.

Elaborate explanations regarding any and all derogatory credit accounts, bankruptcies, or foreclosures. Effort COUNTS on such letters, so don’t try to cut any corners. Put some time into these letters, proofread them, and the “effort factor” WILL count for something. Typically a manual underwrite is a result of poor credit history, so this will most likely apply to you if you are facing a manual underwrite.



US Mortgage Lenders has an extensive lender network that allows us to provide unique and mortgage solutions. Contact US for the most update information on terms and conditions. All Information on this site Is for example, hypothetical purposes and should NOT be relied on for decision making.
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