Compensating factors are positive aspects of a mortgage applicant’s financial profile that can offset weaknesses or concerns in other areas, making them more likely to qualify. To be a better risk for a mortgage lender, focus on improving your credit score, increasing your down payment, demonstrating financial stability, and lowering your debt-to-income ratio.
MANUAL UNDERWRITE FLORIDA
When the mortgage applicant’s information is run through the (AUS) Automated Underwriting System for approval it helps lenders speed up the mortgage approval process. The computer program helps speed up the mortgage application process knowing at the outset whether the mortgage applicant meets the minimum credit and income and debt-to-income ratio requirements. Mortgage loan applications that receive an AUS approval proceed with less paperwork and documentation requirements! If the mortgage is declined the computer result is a Refer/Eligible. These situations may require a manual underwrite to override the AUS computer denial. Not all credit denials qualify for a manual underwrite.
How Do Compensating Factors Work?
Compensating factors are the “Good Parts that offset the Bad Parts” Some examples of compensating factors include:
DOWN PAYMENT- Florida Mortgage lenders like to see that you have skin in the game. The more money you have saved for downpayment, closing costs and reserves better risk you are for a mortgage lender.
PAYMENT SHOCK- For manual underwrite approval mortgage lenders like to see your new payment in line with your current rental history. The “ability to repay” rule requires lenders to make a reasonable determination that a borrower can repay a mortgage, considering factors like income, assets, and debt obligations, before or at the time of loan funding. If your current rental history for the last 12 months is close or similar to the new projected mortgage payment, then you have proven the ability to afford the monthly payments.
INCOME –Florida mortgage lenders like to see as much income as possible. If there is income that can’t be “counted” for underwriting purposes, ig may be considered a “compensating factor”. Examples 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. The more income you can show the better your application looks.
RESERVES- For manual underwrite approval mortgage lenders like to see reserves. Reserves are measured in months. Six months of reserves on hand means six months’ worth of mortgage payments. Money that you’ll have left over after buying or refinancing a home. Liquid reserves can be in checking, savings, or money market accounts, retirement accounts, stocks, bonds, etc. but you’ll need to prove that you can access the money. According to the FHA handbook Reserves refer to the sum of verified and documented liquid assets minus the total funds the Borrower is required to pay at closing.
Manual Underwriting May Be Required If You Have:
- Multiple 30, 60, 90-day late payments.
- Foreclosure, short sale, or deed-in-lieu of foreclosure
- A lack of credit depth No credit history or No Credit score.
- A Chapter 7 or Chapter 13 bankruptcy in the last 24 months
- Judgment Defaults or delinquency on a federal debt
You Might Still Qualify For A Manual Underwrite!
NOTE: Conventional loans must be AUS-approved and cannot be manually underwritten. If a mortgage application is disqualified in an automated system ( the computerized system) you may be eligible for an FHA/VA manual underwrite. A manual underwrite means is that an FHA/VA underwriter will have to override the computer credit dential based on information the computer did not pick up. Furthermore, when facing a manual underwrite you are likely to be required to meet tighter requirements when it comes to things like reserves, debt-to-income (DTI) ratio, residual income, derogatory credit, financial documentation, and compensating factors.
We Provide Manual Underwrite Pre Approvals!
Many FHA mortgage applicants ask us what is “FHA or VA manual underwrites” and what is needed to get a manual underwrite approved.
It’s important for both loan applicants to understand what it means when a mortgage loan officer states that a loan requires a “manual underwrite”. Some FHA and VA mortgage lenders including local banks have no idea what it means to get a manual under the loan approved. So first, let’s start off with the basic definition of what a manual underwrite actually means when it’s applied for FHA or VA mortgage underwriting.
Almost all FHA and VA mortgage FHA mortgage lenders including the large banks you walk into use “automated underwriting systems” (AUS) to help them correctly underwrite or approve mortgage loans. These complex computer systems were developed by Fannie Mae, and Freddie Mac to calculate the risk of a borrower. The software systems developed by Fannie and Freddie are used for conventional conforming loan approvals including approvals. So here is the process:
An FHA or VA mortgage lender will upload (or manually enter) all loan application data reissue your current credit report into the appropriate software system and then “submit” the loan to the automated underwriting systems. Within or about less than 2 minutes if your loan is “ELIGIBLE” the computer system will provide 1 of 3 answers If the loan is “INELIGIBLE” then it can’t be done and the buyer/borrower will probably need to find some type of non-conforming (portfolio or hard money private mortgage lenders) type of loan.to your loan request. The result will either state “Approve”, “Accept”, or “Refer”.
AUS Most Common Responses
- “Approve/Eligible” = You’re Approved for a mortgage!
- “Accept/Eligible”= You’re Approved for a mortgage!
- “Refer/Eligible”= You’re Approved for a mortgage!
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 FHA mortgage 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 manuals underwrites 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 FHA mortgage lenders will offer a manual underwrite on a conforming conventional loan. We offer manual underwriting 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 simply means that a human being must manually “refer” to the entire guideline handbook (depending on the type of loan) to “manually” make sure it meets all guidelines, which requires more time and analysis.
FHA Loan Compensating Factors
VA Loan Compensating Factors
Maximum DTI For Manual Underwrite
Keep in mind that if you are facing manual underwriting, it’s usually due to poor credit or a high debt-to-income ratio. Most FHA mortgage lenders will want to see a housing ratio (mortgage payment + mortgage insurance + home insurance + property taxes + homeowners association dues every month) / (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 FHA mortgage lenders that offer manually underwritten loans will not budge on these ratios, but some will. Generally, with compensating factors, you can get a manually underwritten loan approved with a housing ratio of up to 35% and a DTI ratio of up to 48% at the most, and these FHA mortgage lenders are tough to find.
Elaborate explanations regarding any 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 underwriting is a result of poor credit history, so this will most likely apply to you if you are facing a manual underwrite.
The FHA Mortgage Lenders Manual Underwriting of the Borrower section of the Handbook provides Mortgagees FHA’s policy requirements to
determine a borrower’s ability to obtain FHA-insured single-family financing considering:
– Creditworthiness;
– Effective income; and
– Assets.
None of the information on this page should be relied on. This is not a loan commitment or guarantee of any kind. Loan approval and rate depend on borrower credit, collateral, financial history, and program availability at the time of origination. Mortgage Interest Rates and terms are subject to change without notice. All mortgage loan products are subject to credit and property approval.
