One of the initial steps a loan officer takes when pre-approving someone for an FHA mortgage is to get an automated underwriting approval through the automated underwriting system (AUS). The AUS is a analytical program that is accessed via the internet, it analyzes credit, income, down payment, and credit history/scores amongst other items. It does this all in about 10-15 seconds after the loan officer hits the "submit" button. Most of the time it comes back as an "Approve" or "Accept" (same thing) recommendation and it makes the approval process a lot easier, however there are some times when it comes back as a "Refer" recommendation, which means your loan can still get approved but it's more than likely going to require a human being underwriter to review it in order to make that decision (this is called "manual underwriting"). When your loan needs to be manually underwritten there are certain tighter qualification guidelines that are to be met, including but not limited to a lower debt ratio, cleaner credit history, and any other areas that an underwriter feels you need to be "strong" in.
On January 21st, HUD came out with revised manual underwriting guidelines which they published in a 17-page mortgagee letter (which are official notifications regarding FHA loans) which can be viewed in full at http://portal.hud.gov/hudportal/documents/huddoc?id=14-02ml.pdf.
The biggest changes from previous policy are:
1. Required amount of reserves
2. Maximum debt to income ratios
Reserves
For 1-2 unit properties, there must be at least 1 month of reserves (funds you still have after closing). For 3-4 unit properties, there must be at least 3 months of reserves. It is calculated on the total housing payment (principal, interest, taxes, insurances & HOA dues if applicable). i.e. if P&I is $1,000, taxes are $200, insurance is $50, and HOA dues are $50 then that totals $1,300, so a 1 month reserve would equal $1,300.
Debt to income ratio
Maximum debt ratios are based on credit scores & compensating factors.
- For scores of 580 & below (including no credit scores), the maximum housing debt ratio cannot exceed 31% and the total debt ratio cannot exceed 43% (for energy efficient mortgages (EEM) it's 33/45%).
- For scores of 580 & above, with no compensating factors, the debt ratios also cannot exceed 31/43% (33/45% for EEM's).
- For scores of 580 & above, with 1 compensating factor, the debt ratios cannot exceed 37/47%.
- For scores of 580 & above, with 2 compensating factors, the debt ratios cannot exceed 40/50%.
- For scores of 580 & above, who have at least 6 months of credit history & no discretionary debt (meaning no other debt, and all debt has been paid off within the month it's due for the past 6 months), the debt ratios cannot exceed 40/40% (since there is no other debt, the housing ratio will be the same as the total debt ratio). No compensating factors are needed.
Acceptable compensating factors are:
- Verified and documented cash reserves that equal or exceed three total monthly mortgage payments (one and two units) or that equal or exceed six total monthly mortgage payments (three and four units);
- New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less, and there is a documented twelve month housing payment history with no more than one 30 day late payment (in cash-out transactions all payments on the mortgage being refinanced must have been made within the month due for the previous twelve months).
- Verified and documented significant additional income that is not considered effective income (such as income from a 2nd job that has only been held for a short period of time, bonus income that has not been received for at least 2 years, child support that does not have 3 years left, etc.); can only be used as a 2nd compensating factor, and
- Residial income (same guideline as VA mortgages have, the information is quite extensive and can be found within pages 14-16 in the mortgagee letter)
Previously (and still currently as of this post), nearly all lenders restrict manually underwritten FHA loans to no more than a 31% housing ratio & 43% total debt ratio, but this new guidance will allow lenders to confidently approve debt ratios higher than those if it abides by the new guidelines. Also, we do not see many lenders requiring reserves for manually underwritten FHA loans (except for 3-4 unit properties which have always required at least 3 months reserves), so that will be changing in a few months (4/21/14) as well. How many lenders will start allowing higher debt ratios at that time? I imagine at first just a small percentage, then as time goes by we'll see more and more lenders adapt to the new guidelines. The reserve requirement on 1-2 units will be imposed immediately on new FHA case #'s assigned on or after 4/21/14 though, since that is more restrictive than what most lenders are currently going by.
Overall I feel this will allow more people to qualify when it comes to needing to be manually underwritten for an FHA loan.
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