Manual Underwriting on FHA and VA Loans

This guide will cover manual underwriting on FHA and VA loans. HUD and the Department of Veterans Affairs are the only mortgage agencies allowing manual underwriting on these loans. The coronavirus pandemic has completely disrupted the mortgage markets. The mortgage industry has never been in chaos due to the coronavirus pandemic in the US. Dale Elenteny, a senior mortgage loan originator at GCA Forums, says the following about manual underwriting:

The pandemic shut down the U.S. economy, which was stronger than ever. In just six weeks, the economy came to an abrupt halt. The Dow Jones Industrial Average hit an all-time high of 29,000 in February 2020.

The pandemic sent the Dow Jones and other equity markets tumbling 30%. The 2020 housing market forecast was stronger than ever, and mortgage companies enjoyed record loan applications and revenues. Then something unexpected happened. The COVID-19 pandemic crushed the U.S. economy. Millions of businesses were ordered closed until the economy reopened. Millions of businesses cannot reopen as stay-at-home orders from state governors are in effect. As time passed, the economic damage to businesses was devastating. The GREAT NEWS is that GCA Forums Mortgage Group still processes and funds manual underwriting during the coronavirus pandemic mortgage crisis.

How The COVID-19 Pandemic Crushed The U.S. Economy

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The global coronavirus pandemic hit the United States, destroying the U.S. economy overnight. In weeks, unemployment claims skyrocketed to a whopping 33 million Americans. The lowest unemployment rate, 3.5%, is expected to rise to 20%. Although the Central Bank lowered interest rates to zero percent, mortgage rates for non-prime borrowers skyrocketed. The reason is that the secondary mortgage bond market was in chaos. John Strange, a senior mortgage loan originator at GCA Forums Mortgage Group, says the following about manual underwriting:

Investors in the secondary mortgage bond market had no appetite for borrowers with under 700 credit scores, so many lenders completely revamped their loan programs. Manual underwriting on VA and FHA loans was completely halted.

The suspension of other loan programs, including 203k loans, down payment assistance loan programs, reverse mortgages, and one-time construction financing, remained in effect until further notice. Non-QM lenders have shut down non-QM and alternative portfolio financing until further notice. Many non-QM lenders have gone out of business. Many analysts and real estate economists are worried about another housing and mortgage crisis that may be worse than the 2008 financial crisis. Most mortgage companies have halted manual underwriting during the coronavirus pandemic until further notice.

What is Manual Underwriting

Manually underwritten FHA and VA loans apply when an applicant’s mortgage application cannot be assessed through an Automated Underwriting System (AUS), and an actual underwriter is needed to review the applicant’s financial history. This method is precise and usually has tighter thresholds and more stringent paperwork. Still, it helps borrowers with non-conventional credit patterns, such as poor credit scores or high debt-to-income ratios. This article considers the guidelines, requirements, and actionable steps for borrowers regarding manual underwriting of FHA and VA loans.

Concerning FHA loans, which are the responsibility of the Federal Housing Administration, manual underwriting is usually initiated when the AUS, known as TOTAL Mortgage Scorecard, marks an application with “Refer/Eligible.”

This is common for borrowers with credit scores under 620, high debt-to-income ratios exceeding 43%, or unconventional credit histories. Borrowers with credit scores between 500 and 579 are required to pay 10%, while those with 580 and above only require 3.5% down. Other triggers include recent negative credit events like bankruptcy or foreclosure in the past three years, barring extenuating circumstances such as a documented medical emergency or job loss. When reviewing applications manually, FHA rules set debt-to-income limits at 31% for housing costs and 43% for total debt, but these can go up to 47% with one extra positive factor or 40% and 50% with two extra factors. Compensating factors are attributes that bolster the application, which may include having at least one month’s mortgage payment in reserves for one- to two-unit properties or three months for three- to four-unit properties, a new mortgage payment that is less than $100 or 5% more than current housing costs, a twelve-month history of on-time rent payments, residual income, or steady employment exceeding two years.

Manual Underwriting Mortgage Process

Borrowers must submit extensive documentation, such as explanation letters for bad credit, pay stubs, tax returns, bank statements, and more. Moreover, credit restrictions are strict, so there should be no overdue payments in the past two years. Multiple past-due payments, however, might be accepted if there is evidence of extraordinary circumstances. Auxiliary credit, such as rental or utility bills, can be utilized without traditional credit but requires at least a year of prompt payments. It may take weeks to days, depending on the ease of the case and the speed at which you submit the required documents. The results may be full approval, partial approval requiring further documentation, or rejection if some conditions, like recent overdue payments, are unresolved.

VA loans are available to veterans, active service members, and qualifying surviving spouses. The Department of Veterans Affairs backs them. Manual underwriting is employed when the AUS, like Desktop Underwriter, denies due to credit risks, high debt-to-income ratio, or thin credit file.

These triggers include a 2-year Chapter 7 bankruptcy, a 1-year post-Chapter 13 bankruptcy payment but no prior payments, foreclosure, or federal defaulted debt within 2 years. We also consider manually triggered DTI above 45-50%; however, we accept cases up to 60-65% with strong “compensating” factors. VA guidelines recommend a maximum DTI of 40% for housing expenses and 50% for total debt with at least two compensating factors, including insufficient surplus income, one- to three-month reserves, 12 months of on-time rent, stable employment, or minimal additional debt. Submission of a VA certificate of eligibility, pay stubs, tax returns, bank statements, and employment documents, along with explanation letters for credit issues, is required. The VA has no minimum requirement for the age of credit lines but does require a timely payment history of 12 months on all debts. Other lenders may permit some leeway on aged payments, with supporting documents showing extenuating circumstances and strong compensating factors.

Non-Traditional Credit on Manual Underwriting

Rent and utility payments qualify as non-traditional credit after 12 months of on-time payments. The property must meet VA Minimum Property Requirements, validated through an appraisal reviewed by the underwriter. The timeframe ranges from three to six weeks. This estimate is based on the borrower’s financial situation and the lender’s speed. Outcomes mirror FHA loans: outcomes consist of full approval, conditional approval requiring more documentation, or denial due to insufficient income or unresolvable credit issues.

Manual Underwriting on FHA and VA Loans

FHA and VA manual underwriting have similarities, but some key differences exist. There is a need for a 24-month history of timely payments for FHA loans, whereas, with VA loans, only 12 months is necessary. Based on credit score, a 3.5% or 10% AA down payment is required for FHA loans. For VA loans, no down payment is required. Stricter debt-to-income caps exist for FHA loans as opposed to VA loans, which are more lenient, particularly with strong compensating factors and residual income on the subcomponent. FHA loans are available to the general public who meet all credit and income criteria. On the other hand, only eligible veterans and their spouses with a Certificate of Eligibility can apply for VA loans.

Focused preparation improves one’s chances of successfully navigating manual underwriting. Experience with certain processes differs among lenders, so choosing one specializing in manual underwriting makes a difference. Gathering documents like pay stubs and tax returns in advance makes the process faster.

Resolving credit disputes, paying off debts, and showcasing positive traits like stable employment bolster one’s credit score and improve the application. Please respond to requests for additional documentation that are important for staying on track. A co-borrower with better credit also aids the applicant. Stricter requirements than AUS approvals, varying from lender to lender, and additional rules set by some lenders make the process cumbersome. Compiling evidence of mitigating circumstances, such as providing medical records for late payments, supports the request for exceptions.

Manual Underwriting Eligibility Guidelines

To summarize, the manual underwriting process for FHA and VA loans caters to borrowers with under-average credit scores or those lacking traditional credit profiles who would otherwise not qualify through automated means. FHA loans have stricter payment history and debt-to-income ratios than VA loans, which tend to be more lenient, with no down payment required. Both loan types require factors that mitigate risk, such as stability in employment, sufficient reserves, and low balances on liquid assets. For optimal results, borrowers must engage with seasoned lenders and provide detailed information, documentation, and prompt replies to borrower inquiries. Talk to a lender or visit HUD.gov for FHA manual underwriting guidelines and benefits. va.gov for information concerning VA loans.

Importance of Manual Underwriting

All residential mortgage loan programs must go through Fannie Mae’s and Freddie Mac’s automated underwriting system (AUS). If the borrower meets all of the agency mortgage guidelines on the particular loan program, the AUS will render an approval/eligibility per AUS findings. If the automated underwriting system determines the borrower is eligible but the system cannot render a decision, then a refer/eligible per AUS finding will be rendered. Refer/eligible per automated underwriting system means the borrower may be eligible for the particular loan program if a human mortgage underwriter manually underwrites it. FHA and VA loans are the only two programs allowing manual underwriting. Many mortgage companies have suspended manual underwriting during the coronavirus pandemic mortgage crisis. The lender has the authority to downgrade an approved or eligible file from the automated underwriting system to a manual underwrite. However, GCA Forums Mortgage Group continues to operate normally with manual underwriting for VA and FHA loans.

Lenders Suspending Manual Underwriting During Coronavirus Mortgage Crisis

The coronavirus pandemic has created a national mortgage crisis in the United States. Due to liquidity issues in the secondary mortgage bond markets, lenders made many changes to protect their interests. Lenders made drastic changes to the mortgage loan programs they were offering. Non-QM lenders have completely ceased doing business until further notice. Most lenders implemented countless lender overlays.

Some lender overlays that financiers imposed were the following:

• There are higher credit scores on government and conforming loans.
• Lower debt-to-income ratio requirements.
• There should be a higher down payment and lower loan-to-value overlays.
• There have been higher loan-level pricing adjustments.
• There is no manual underwriting on FHA and VA loans.
• No FHA 203k Loans.
• No Reverse Mortgages.
• We have suspended the mortgage programs for down payment assistance until further notice.
• There will be no jumbo loans available until further notice.
• There will be no non-QM loans available until further notice.

Qualifying For Manual Underwriting During Coronavirus Mortgage Crisis With A Lender With No Overlays

The great news is that GCA Forums Mortgage Group is still offering and funding manual underwriting during the coronavirus mortgage crisis. GCA Forums Mortgage Group offers most other loan programs during the COVID-19 mortgage crisis. This includes FHA 203k loans, non-QM loans, and jumbo mortgages. GCA Forums Mortgage Group is one of the very few national mortgage lenders that still originate and fund borrowers with under 620 credit scores during the COVID-19 pandemic mortgage crisis. If you have any questions or want to qualify for a mortgage with a lender with no overlays, please get in touch with us at GCA Forums Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at GCA Forums is available 7 days a week, evenings, weekends, and holidays.