What is Manual Underwriting and How Does it Work?

In this blog, we will discuss and cover frequently asked manual underwriting mortgage questions. Manual Underwriting is allowed on FHA and VA loans. Both VA Loans and FHA Loans can be manually underwritten when borrowers cannot get an approval/eligible per Automated Underwriting System. One of the key factors that are very important on VA and FHA Manual Underwriting is that borrowers cannot have any late payments in the past 12 months. Also, verification of rent is required on all manual underwrites.

Frequently Asked Manual Underwriting Mortgage Questions On Manual VA and FHA Loans

The mortgage process does not have to be complex and/or confusing.

The mortgage process does not have to be complex and/or confusing. However, there are many steps in the mortgage process. There are also different types of ways mortgages are processed, underwritten, and closed. One of the most frequently asked mortgage guidelines is about manual underwriting. We will cover the key FAQ on manual underwriting in the next few paragraphs.

How long does manual underwriting take?

FHA and VA manual underwriting do not take much longer than an automated underwriting system (AUS) approved file. Normally, counting one week longer versus an AUS-approved file is a good estimate. Most AUS files take 30 days. Manual underwriting files will generally take 5 weeks.

Who uses manual underwriting?

 

VA and FHA are the only two mortgage loan programs that allow manual underwriting. If a borrower cannot get an approve/eligible per automated underwriting system (AUS) and gets a refer/eligible, the file can be approved through manual underwriting. Manual underwriting guidelines apply. One key factor in manual underwriting is the borrower needs timely payments in the past 24 months.

What are red flags for underwriters?

Mortgage underwriters will look out for key red flags when underwriting a file. Some obvious key red flags include overloaded credit card balances, multiple credit inquiries in a short period of time, high debt to income ratios, multiple overdrafts, large irregular deposits without documentation, recent derogatory credit tradelines.

What happens after automated underwriting?

Once a borrower gets an approve/eligible per automated underwriting system (AUS), the file will proceed to processing and underwriting. The automated underwriting system (AUS) is the entry point if the borrower’s loan application will proceed. If the AUS renders a refer/eligible per AUS, then the file will be downgraded to a manual underwrite if the borrower meets manual underwriting guidelines.

Verification Of Rent Requirements On Manual Underwriting
Frequently Asked Manual Underwriting Mortgage Questions: Verification Of Rent Requirements On Manual Underwriting

CLN will exempt verification of rent for borrowers who are living rent-free with family due to saving money for their down payment and closing costs of the home purchase. Capital Lending Network, Inc. will provide a living with a family rent-free form that needs to be completed, dated, and signed by all parties.

FHA Chapter 13 Bankruptcy Manual Underwriting Guidelines

All FHA Loans and VA Loans During and After Chapter 13 Bankruptcy are manual underwrites. There are no waiting period requirements after the Chapter 13 Bankruptcy discharged date to qualify for FHA and/or VA loans. If the discharged date of the Chapter 13  Bankruptcy has not been seasoned for two years, the FHA and/or VA loan needs to be manually underwritten.

Automated Underwriting Versus Manual Underwriting

The Automated Underwriting Systems is a sophisticated automated approval system that the majority of lenders use for the initial mortgage loan qualification for borrowers:

Most mortgage lenders favor the Fannie Mae version and not all mortgage lenders will go with LP Findings.

Automated Underwriting System Automated Approval

The Automated Underwriting System is like a human brain.

The AUS analyzes the following information within a matter of seconds:

  • Borrower’s income
  • Assets
  • Credit
  • Credit history
  • Job
  • Job history
  • Debts
  • Liabilities
  • Front-end debt to income ratios
  • Back-end debt to income ratio
  • Prior bankruptcies
  • Judgments
  • Tax liens
  • Public Records
  • Reserves
  • Current as well as past late payments and derogatory accounts

Within minutes of inputting the mortgage loan borrower’s information, the Automated Underwriting System yields a decision of the following:

  • Approve/Eligible
  • Refer/Eligible
  • Refer With Caution

What Are Key Points Of The Manual Underwriting Guidelines

The decision everyone expects is approve/eligible. Mortgage Applications that get a referred/eligible means that the borrower is eligible for a mortgage loan but the AUS cannot render a decision. The file needs to go to manual underwriting which means it needs to be reviewed by an underwriter manually and it is up to the underwriter to render a decision based on the credit risks.

Referred/ineligible means the borrower does not qualify for a mortgage loan. These reasons can be waiting periods not being satisfied, too many late payments, or the borrower not meeting one or more mortgage lending guidelines.

What Happens If Denied By Automated Underwriting System (AUS)

There are lenders, like myself, that do many manual underwriting mortgage loans

Not too many lenders do manual underwriting nor follow manual underwriting guidelines:

  • Borrowers get denied by either Fannie Mae’s or Freddie Mac’s Automated Underwriting System, do not give up
  • There are lenders, like myself, that do many manual underwriting mortgage loans
  • Manual Underwriting does require more time and your mortgage application is more scrutinized
  • Manual underwriting mortgage loan’s mortgage rates are slightly higher due to the risk factor

Before a mortgage loan originator submits a mortgage application as a manually underwriting file, the mortgage loan originator will know whether the file will get approved or not.

Manual Underwriting Process And Requirements

For mortgage applicants who get referred/eligible per automated findings, manual underwriting will be the only option to get a mortgage loan approval. Manual Underwriting Guidelines require a 31% front-end ratio debt to income ratio and 43% back-end debt to income ratio. The manual underwriting underwriter can exceed the front and back-end debt-to-income ratios as high as 40% front-end debt-to-income ratios and 50% back-end debt-to-income ratios.

Compensating Factors In Manual Underwriting

What is key to getting a mortgage loan approval with a manual underwriting approval is compensating factors. Compensating factors are the advantages that the borrower has to offset the risk factor in the underwriter’s decision in approving the borrower’s mortgage loan. Reducing risk is the key to a mortgage loan approval.

Debt To Income Ratio Versus Compensating Factors

Compensating factors are taken into consideration by mortgage underwriters on manual underwrites:

  • High credit scores are key and a great compensating factor
  • Bigger down payments than the 3.5% down payment required is a strong compensating factor
  • The more money a homebuyer puts down on the home purchase, the less risk the mortgage lender has
  • Having at least 3 months’ reserves of principal, interest, taxes, and insurance is a huge compensating factor
  • Lower debt-to-income ratios are a major plus and reduce the risk for the mortgage lender
  • Rental verification if a strong compensating factor
  • The only way to verify rental verification is to provide the mortgage lender 12 months canceled checks unless they are renting a home from a registered property management company

Renters can get a letter from the property management manager stating that have been timely with paying rent for the past 12 months.

Manual Underwriting Mortgage Lenders
Manual Underwriting Mortgage Lenders

A substantial percentage of our business at Capital Lending Network, Inc. are manual underwrites. Home Buyers needing to qualify for FHA and/or VA Loans via manual underwriting with a mortgage company licensed in multiple states with no lender overlays on government and/or conventional loans, please contact us at CLN Mortgage at 800-900-8569 or text us for faster response. Or email us at contact@capitallendingnetwork.com. The team at Capital Lending Network, Inc. (CLN) is available 7 days a week, evenings, weekends, and holidays. In the following paragraphs, we will be covering manual underwriting mortgage guidelines on VA and FHA loans.

FHA And VA Manual Underwriting Guidelines

The mortgage approval process starts when borrowers complete the official mortgage application also called 1003. Borrowers also need to provide necessary documents such as the following:

 The Steps In The Mortgage Process

The mortgage loan originator then pulls credit from the three credit reporting agencies.

Within minutes, the Automated Underwriting System will render its decision as follows:

  • approve/eligible which is basically an automated approval.
  • refer/eligible which means that the automated underwriting system cannot render an automated approval and needs to be manually underwritten.
  • refer/caution which is an automated denial.

Types Of Automated Underwriting System

There are two different types of Automated Underwriting Systems:

The majority of lenders will run DU versus LP. This is because they are not a Freddie Mac approved mortgage lender.

  • If borrowers get an approve/eligible per DU FINDINGS, it is an automated approval with conditions.

Some of these conditions may require the following:

  • reserves
  • rental verification
  • other items in order for the DU FINDING to be a valid approve/eligible

Automated Underwriting System Conditions

There are times when borrowers will get an approve/eligible per DU FINDINGS but cannot deliver on the conditions:

  • For example, the approve/eligible DU FINDINGS may condition that the mortgage loan applicant needs rental verification.
  • A rental verification can only be acceptable if renters can provide 12 months’ canceled checks and/or bank statements paid to landlords.
  • For renters renting from the property management company, a Verification Of Rent (VOR) Form provided by the lender can be completed by the property manager and signed and dated.
  • VOR Form can be used in lieu of 12 months’ canceled checks and/or bank statements.
  • Renters who cannot provide canceled checks and have been paying the landlord with cash, then approve/eligible per DU FINDINGS will be null and void since it was conditioned on AUS.

What can the mortgage loan applicant do?

Mechanics Of Automated Underwriting System
Frequently Asked Manual Underwriting Mortgage Questions Mechanics Of Automated Underwriting System

The Automated Underwriting System is an extremely sophisticated computer system that will evaluate every aspect of borrowers.

The following is analyzed by the Automated Underwriting System:

  • credit history
  • credit scores
  • public records
  • asset, income
  • late payments
  • collections/charged-off accounts
  • bankruptcy and/or housing events
  • late payments after bankruptcy and/or housing event
  • special emphasis is placed on payment history in the past 12 months

Fannie Mae Versus Freddie Mac AUS

Borrowers who cannot provide conditions requested by Fannie Mae’s Desktop Underwriter’s DU FINDINGS, then mortgage loan originator can submit the file to Freddie Mac’s Loan Prospector Automated Underwriting System. There are times where Fannie Mae may not render an approve/eligible but Freddie Mac will.

AUS Findings On Fannie Mae Versus Freddie Mac AUS

There are many times where conditions requested by Fannie Mae’s Automated Underwriting System are not conditioned from Freddie Mac’s Automated Underwriting System. As with the rental verification example, Fannie Mae’s Automated Underwriting System can condition it. But Freddie Mac’s Automated Underwriting System may not request it. However, if Freddie Mac’s LP Findings conditions rental verification and the mortgage loan applicant cannot provide it, what do you do? Loan Officers can run both Fannie and Freddie and see which system to go with.

Manual Underwriting Mortgage Process

Manual Underwriting is when a mortgage underwriter needs to review the file and manually underwrite the borrowers’ file. Borrowers cannot have any late payments in the past 12 months. Verification Of Rent is required on all manual underwrites. Cases, where borrowers have credit disputes and cannot retract them, need to be downgraded to manual underwriting. All VA Loans And FHA Loans with borrowers in a Chapter 13 Bankruptcy Repayment Plan needs to be manually underwritten. All VA and FHA Home Loans after Chapter 13 Bankruptcy discharge, but with less than 2 years seasoning need to be manually underwritten.

Maximum DTI Guidelines On Manual Underwriting

Maximum debt to income ratio allowed on manual underwrites is capped at 50% with compensating factors:

Examples of compensating factors are the following:

  • Less than 5% payment shock.
  • Reserves of Principal, Interest, Taxes, Insurance (PITI).
  • The second job with at least one year of seasoning, but not two years, yet is not used as qualified income.

Conditions Requested By Underwriters During Approval Process

There are many mortgage loan applicants who get automated approval by Fannie Mae's and/or Freddie Mac's Automated Underwriting System but cannot qualify due to the fact that they cannot provide the conditions requested

There are many mortgage loan applicants who get automated approval by Fannie Mae’s and/or Freddie Mac’s Automated Underwriting System but cannot qualify due to the fact that they cannot provide the conditions requested. Rental verification, employment verification, minimum credit tradelines, reserves are some of the conditions that the automated underwriting system may require.

Refer/Eligible Per Automated Underwriting System (AUS) Findings

If borrowers get a refer/eligible per AUS, it can be downgraded to manual underwriting. Not all lenders do manual underwriting. Manual Underwriting is only offered by a few mortgage lenders. Manual Underwriting is when the file is manually underwritten by a mortgage underwriter. The underwriter will evaluate the whole mortgage file manually. Will look for compensating factors in deciding whether or not to approve. Manual underwrites are files that need to meet all manual underwriting mortgage guidelines.

Mortgage lenders who Are Experts In Manual Underwriting

Capital Lending Network, Inc. is a five-star national mortgage company licensed in multiple states with no overlays on government and conventional loans. We offer manual underwriting on VA loans and FHA Mortgages. Borrowers who need to qualify for a mortgage with a lender with no overlays can contact us at CLN Mortgage at 888-900-1020 or text us for a faster response. Or email us at contact@capitallendingnetwork.com. The team at GCA Mortgage Group is available 7 days a week, on evenings, weekends, and holidays.

Underwriting System Approval

Every mortgage loan application is submitted for automated approval via the Desktop Underwriter’s Automated Underwriting System. The Automated Underwriting System is a computer system that will analyze the information stated on the mortgage application. AUS will analyze the mortgage loan applicant’s credit reports and credit scores.

How Does The Automated Underwriting System (AUS) Work?

The Automated Underwriting System will take income, debt, assets, liabilities, monthly payments, credit, credit history, credit tradelines, prior derogatory credit including bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. Judgments and tax liens will be taken into account as well. Within minutes of submitting a mortgage package for DU Automated Underwriting System Approval, the Desktop Underwriter will render a decision as to whether the file has been approved or denied.

Difference Of Manual Underwriting Versus Automated Underwriting System Approval

The Automated Underwriting System Approval will issue an automated approval with findings. The Automated Underwriting System Approval will state what the conditions will be. For example, the Automated Underwriting System Approval Findings will decide whether collections need to be paid off or whether rental verification is needed as well as other conditions the computer system decides.

How Automated Underwriting System Analyzes Findings

The Automated Underwriting System (AUS) will recognize from the credit report whether the borrower has passed the required waiting period after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale. The Automated Underwriting System will also decide whether the mortgage loan borrower will need to provide rental verification or not. Rental verification can only be proven by canceled checks for the prior twelve months or by a letter from a registered property management company.

Importance Of Documented Income

Cash monthly rental payments and private rental receipts cannot be used for rental verification. If a borrower has credit scores of over 620, the chances are that they would not need rental verification. Credit scores under 620 will most likely require rental verification.

Debt To Income Ratios

The Automated Underwriting System Approval will also decide what the maximum debt-to-income ratio a borrower will be capped at. For borrowers with Credit Scores of 620 or higher, the debt to income ratios might be capped at 56.9%. For those with Credit Scores under 620 FICO, the chances are that the Automated Underwriting System will cap the debt-to-income ratio at a much lower level such as 43%. It could cap the debt to income ratio higher depending on the strength of the borrowers.

Manual Underwriting With High Debt To Income Ratio

There are cases where the automated underwriting system will go up to 46.9% front-end and 56.9% debt to income ratio on borrowers with under 620 FICO and even down to a 500 credit score. This will happen only if the borrower has a strong credit profile like reserves, larger down payment, no late payments in the past 24 months, and strong multiple compensating factors.

How Does Manual Underwriting Versus Automated Underwriting System Approval Work

Back to Work Extenuating Circumstances FHA mortgage loans cannot be detected by DU Automated Underwriting System. It will get denied. With the defunct Back to Work Extenuating Circumstances FHA loan program, underwriting needed to be manually underwritten. Lenders that do not do a manual underwrite cannot approve Back to Work Extenuating Circumstances FHA Loans.

The Ill-Fated FHA Back To Work Mortgage Program
The Ill-Fated FHA Back To Work Mortgage Program

Back to Work Extenuating FHA mortgage loans is an extenuating circumstance FHA loan program that has been discontinued. The waiting period gets shortened to a one-year waiting period after someone has a foreclosure, deed in lieu of foreclosure, short sale, or bankruptcy.

Strict guidelines apply and the borrower needs to prove that he or she has had been unemployed for at least six months prior to the bankruptcy or foreclosure:

  • And/or had a reduction of at least 20% of total household income for a least six months prior to the bankruptcy and/or foreclosure

Candidates for the Back to Work Extenuating Circumstances FHA mortgage loan program need to complete a one-hour HUD-approved housing counseling program:

  • They also need to prove that they are on their feet and have been paying their monthly credit obligations on time for the past 12 months

UPDATE On FHA Back To Work Mortgage Program

The above article on FHA Back To Work Mortgage Program will remain for archival purposes. HUD has discontinued the FHA Back To Work Due To Extenuating Circumstances. The program turned out to be a complete failure and not too many lenders were successful with the FHA Back To Work Mortgage Loan Program.

Does Getting A DU Automated Approval Guarantee Mortgage Loan?

Many lenders will not even look at a mortgage loan application without a DU Automated Approval by the Automated Underwriting System. A DU Automated Approval does not guarantee a mortgage loan approval by mortgage lenders with overlays. A large percentage of mortgage lenders have their own internal mortgage overlays.

For example, just because a mortgage loan borrower got an automated approval with a credit score of 580 does not mean that the mortgage lender will accept that borrower. That particular lender might have their own internal mortgage underwriting overlays where they will not accept a mortgage loan applicant with a minimum of a 640 FICO score.

Lender Overlays On Manual Underwriting Versus Automated Underwriting System Approval

This holds true as long as the mortgage underwriter can verify your income, debts, liabilities, and assets.

The great news is CLN Mortgage is a lender with ZERO LENDER OVERLAYS. We will go strictly off the DU Findings from the Automated Underwriting System. As long as you get an automated approval by Fannie Mae’s Automated Underwriting System, the mortgage loan application will get approved. This holds true as long as the mortgage underwriter can verify your income, debts, liabilities, and assets.

This Article Is On Manual Underwriting Versus Automated Underwriting System Approval

What is manual underwriting on home mortgages?

All mortgage applications need to go through the automated underwriting system, often referred to as AUS after the loan officer has taken the 1003 loan application, ran a tri-merger credit report, and reviewed documents. There are two different types of automated underwriting system. Fannie Mae’s Desktop Underwriter commonly referred to as DU and Freddie Mac’s Loan Prospector also referred to as LP. Fannie Mae’s DU AUS is the more popular AUS used by loan officers.

The automated underwriting system is a sophisticated highly technologically advanced computerized system that all loan applications need to go through in order to proceed to the next level. The automated underwriting system can render an automated finding about the borrower’s eligibility in a matter of seconds. To proceed to the next step of the mortgage process, the findings need to render an approve/eligible. An approve/eligible per AUS Findings mean the borrower meets all the minimum agency guidelines.

The second findings the AUS can render is a refer/eligible per AUS. A refer/eligible means that the AUS determined the borrower is eligible but cannot determine whether or not the borrower is fully approved. The automated underwriting system refers the file to a human mortgage underwriter for a manual underwrite. The third type of findings from the automated underwriting system is a refer with caution. Refer with caution means the borrower does not qualify for a mortgage.

FHA and VA loans are the only two mortgage programs that allow manual underwriting. The main difference between manual underwriting versus automated underwriting system  is caps on debt to income ratios. Everything else is pretty much the same. Mortgage underwriters have a lot of underwriter discretion on manual underwrites. Compensating factors are important on borrowers with higher debt to income ratio on manual underwriting.

How Does The Automated Underwriting System Work In The Mortgage Process

With an approve/eligible per AUS, loan officers who work at mortgage companies with no lender overlays can issue a pre-approval letter. Loan officers who work at mortgage companies need to make sure borrowers meet their lender overlays after the AUS approval. Loan officers who work at mortgage companies with lender overlays need to go through a second tier of the pre-underwriting process and check if the borrower will meet their company’s lender overlays.

For example, if a borrower with a 580 FICO got an approve/eligible per AUS on an FHA loan with a 580 FICO but the mortgage company has overlays on credit scores of 620, the borrower will not qualify at that particular lender.

Lender overlays are higher lending requirements above and beyond the minimum agency guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac. Most lenders will have lender overlays. Lenders can impose lender overlays on just about anything and everything. The good news is Capital Lending Network, Inc. has no lender overlays on government and conventional loans. We just go off the AUS findings. We have zero lender overlays. An approve/eligible means the borrowers will close the loan if they meet all the conditions listed on the AUS approval.

Automated Underwriting System Approved Borrower Downgraded To Manual Underwrite

There are cases where automated underwriting system approved borrowers get downgraded to a manual underwrite by the lender. What is the reason for getting the file downgraded to manual underwrite?  That is up to the lender. It does not need to be downgraded but the lender may feel the file is just too risky for an automated underwriting system approved underwrite. If the borrower does not feel comfortable with the manual downgrade, they can transfer the file to another lender that will not downgrade the file.

Normally smaller mortgage bankers who do not want to take a lot of risk often manually downgrade AUS-approved borrowers. Mortgage underwriters will carefully review a loan applicant’s loan application, credit report, and mortgage documents. The underwriter will go over the borrower’s overall credit/income profile and the reasoning for the manual underwrite. The mortgage processor will have all the documents ready and labeled for the mortgage underwriter to review the file with ease which includes a detailed letter of explanation.

Preparing The File For Mortgage Underwriting

Mortgage underwriters will not look at files that has documents that are not legible, missing pages, not properly labeled, or that is not clear. If a file is confusing and not clear to the mortgage underwriter, it will get kicked back and/or placed in suspense. An experienced mortgage processor will not submit a file to the underwriter unless the file is complete and easy for the mortgage underwriter to review and render a decision.

The following documents will be carefully reviewed and analyzed by the mortgage underwriter during a manual underwrite:

  • Summary report for the mortgage underwriter about the borrower
  • 60 days of bank statements and/or other asset information
  • Two years of income tax returns, W2s, 1099, P and L, retirement accounts(if being used for qualified asset verification) and/or other income documents that are applicable
  • Full complete bankruptcy documents, foreclosure/deed in lieu of foreclosure/short-sale documents if applicable
  • Completed mortgage loan application, credit report, AUS Findings Report
  • Verification of employment
  • Verification of rent
  • Letter of explanation for recent credit inquiries and the outcome of the inquiries
  • Letters of explanation for derogatory credit tradelines, outstanding collections/charged-off accounts, prior bankruptcy and/or a housing event
  • List of compensating factors and supporting documents

The mortgage processor should have a file neatly organized, labeled, and complete for a mortgage underwriter.

Cases When The Borrowers Need Manual Underwriting

There are instances where a file needs to be manually underwritten. The only FHA and VA loans allow for manual underwriting.

Here are cases where borrowers need manual underwriting:

  • Borrowers with no credit scores and no credit tradelines need to be manually underwritten
  • Borrowers with no credit scores and no traditional credit tradelines can use nontraditional credit 
  • Nontraditional credit are creditors that do not report on credit bureaus such as utilities, cell phone carriers, education, insurance payments, and other creditors
  • Borrowers in Chapter 13 Bankruptcy repayment plan can qualify for an FHA and VA loans during the repayment plan 
  • Borrowers need to be in a Chapter 13 Bankruptcy repayment plan for at least 12 months to be eligible for an FHA and/or VA loan 
  • Chapter 13 Bankruptcy does not need to be discharged to qualify for FHA and/or VA loans during Chapter 13 repayment plan
  • Bankruptcy trustee approval required
  • All FHA and/or VA loans during Chapter 13 Bankruptcy repayment needs to be manual underwriting
  • Manual underwriting guidelines apply
  • There is no waiting period requirements after the Chapter 13 Bankruptcy discharge date on FHA and VA loans
  • Any Chapter 13 Bankruptcy discharge not seasoned for at least 24 months needs to be manually underwritten
  • Borrowers with outstanding credit disputes who cannot get rid of the disputes can be manually underwritten

There are instances where lenders will just downgrade an approve/eligible per AUS file to a manual underwrite. This is up to the lender and is often done due to lender overlays. The individual lender may feel the automated approved borrower is just too risky for them and the only way they will proceed is through manual underwriting.

For example, borrowers with automated underwriting system approvals with larger collections/charged-off accounts, late payments after bankruptcy/foreclosure, high debt to income ratios, or those with other layered risk factors under the eyes of the lender may be downgraded to a manual underwrite. Again, a downgrade from a AUS-approved findings can be downgraded to manual underwriting depending on the lender.

Manual Underwriting Guidelines On Debt To Income Ratio

Mortgage underwriters has a lot of underwriter discretion when it comes to debt to income ratio on manual underwriting. Here is the generally recommended debt-to-income ratio guidelines on FHA and VA loans on manual underwrites:

  • 31% front end and 43% back end debt to income ratio for borrowers with no compensating factors
  • 37% front end and 47% back end debt to income ratio for borrowers with one compensating factor
  • 40% front end and 50% back end debt to income ratio for borrowers with two compensating factors

Borrowers with higher than the above debt-to-income ratios can exceed those caps if the mortgage underwriter uses her discretion due to borrowers having strong compensating factors.

Importance Of Compensating Factors On Manual Underwriting

Importance of compensating factors on borrowers with higher debt to income ratio on FHA and VA loans. Debt to income caps on manual underwriting depends on the number of compensating factors borrowers have. Compensating factors are positive factors borrowers have that reduce the layered risks of lenders.

Here are compensating factors mortgage underwriters take into consideration:

  • Low payment shock of 5% or less
  • Part-time and/or other income not used as qualified income but the borrower has a history of making such income for a period of at least 12 months
  • Borrowers who have a history of saving money over the course of the past few years
  • All manual underwrites require one month of reserves
  • Having three or more months of reserves is considered a strong compensating factor
  • Larger down payment means the borrower has skin in the game and is less risk for the lender if the borrower defaults foreclose
  • The borrower has a non-borrowing spouse with full time income

Mortgage underwriters have a lot of power and discretion on manual underwriting. Mortgage underwriters can exceed the 40% front-end and 50% back-end debt-to-income ratio caps on manual underwriting if the underwriter sees multiple compensating factors. Again, mortgage underwriters have a lot of underwriter discretion on manual underwriting borrowers. Each manual underwriting borrower is underwritten on a case by case scenario basis.

Starting The Mortgage Approval Process With A Lender With No Overlays

If you got denied a mortgage loan after you had an automated approval by a mortgage lender, please contact us at CLN Mortgage 888-900-1020 or text for a faster response. Or email us at contact@capitalendingnetwork.com or you can always visit us anytime at www.capitallendingnetwork.com.

A large portion of my business is closing on mortgage loans that have been denied at other mortgage companies.  I can close most mortgage loans in 3 weeks or less and have 24 mortgage loan approvals from the date I get the borrower’s signed mortgage application and required documents such as tax returns, paycheck stubs, 2 months’ bank statements, and other documents.


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.