Loan Officer Training - 11/13/2024 - Understanding FHA Manual Underwriting

FHA manual underwriting can open doors for borrowers with unique financial profiles, but it requires a thorough understanding of guidelines and a keen eye for detail. In this episode of Loan Officer Training, we break down the essentials of FHA manual underwriting, empowering you to navigate this alternative pathway to loan approval with confidence.

Join us as we explore what triggers manual underwriting, key differences from automated underwriting, and the specific requirements for FHA loans. We’ll cover critical aspects like compensating factors, debt-to-income (DTI) limits, credit history considerations, and documentation standards, helping you assess risk and make informed decisions on complex files. Through real-world examples, you’ll learn how to identify eligible borrowers, guide clients through the process, and effectively present cases to underwriters.

Whether you’re a seasoned loan officer or new to FHA loans, this episode provides actionable insights and best practices to make manual underwriting a powerful tool in your lending toolkit. Tune in to unlock the potential of FHA manual underwriting, helping you reach more clients, close challenging loans, and grow your expertise in the FHA lending space!

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Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get

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Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as acc...

Transcript

Restream recording Nov 13, 2024 • 05:00:47 PM: 0:13

So, uh, so FHA manual underwriting. is a loan that is manually underwritten by an underwriter who makes the decision to approve or deny the loan. As the name implies, it is not automated underwriting. An actual human being has to make the decision. So please note the following scenarios under which a file must be manually underwritten. First one would be that you run it through automated underwriting and you receive a refer. Whether it be refer with caution or refer eligible or refer ineligible, it is still a refer, meaning the system cannot, uh, fully assess the risk and cannot provide a findings. Please also note that a manual underwrite, and this one is sort of a redundancy, but it is when an application is downgraded to a manual underwrite. I'm going to get into some of the scenarios where they get automatically downgraded in the next slide. And when FHA programs require manual underwriting for the application, depending on. The program type. So, the main thing to know when you are going to refer a file is that the PI is reduced. Because now, remember, we are on manual underwriting guidelines. We are not on automated underwriting guidelines, which are totally different, right? If you send the file Submitted through AUS for FHA, it's going to give you an approval with as high of a DTI as 45. 9 on the housing expense and as high of a DTI as 56. 9 on the total debt. However, as you can see there, the DTI is reduced when it's a manual underwriting where you're looking at maximum housing expense of 31 percent. and maximum total debt expense of 43%. Total debt is housing expense plus other debt service. Now, the DTI can be higher up to 40 percent housing expense, 50 percent total debt with compensating factors. So, compensating factors that we're talking about here. Uh, first one would be verified and documented cash reserves of three of three months or greater for one or two unit property or six months or greater for three to four unit property. And both of these are excluding Gifts, right? Gifts cannot be considered toward reserves because a gift is a gift. Just like when you're running an automated underwriting and the borrower has very little or no money of their own and it's all coming from a gift, then if your borrower has not so good credit, you may not get an auto approval because they didn't have enough of their own money saved up. The system does, uh, deem them for not being able to save. Another compensating factor that can allow you to get higher DTI or just allow the underwriter to approve the deal, regardless, would be if there is a minimal increase in housing expense of not more than 100 per month or 5%. Whichever is less and no more than one 30 day late in the last 12 months. And other compensating factor that will assist is if the borrower has residual income. Now they, uh, FHA does use the VA table for residual income, depending on the part of the country that you're in, uh, keep in mind, residual. Minus, uh, the income tax due for the income of that month. They're, they're looking at net total income minus total fixed payments, uh, minus, you know, that's housing expense minus, uh, estimated maintenance and utilities. minus job related expenses and minus grossed up non taxable income. So once you do all that minusing, you get to a residual income amount. And if you're over the residual income requirement for the area and based on the number of members in the family, then you have a good chance. And another compensating factor for manual underwriting is No discretionary debt. In other words, the housing payment is the only open account with a balance not paid off monthly. That doesn't mean they can't have any accounts that they're making payments on. That just means that, um, for at least the last six months, they have to be able to document that every month they pay all their accounts in full every month so that the only account left to pay. with a balance is the housing expense because the other ones paid off would mean you have a 300 balance on a credit card that month you pay the whole 300 balance on the credit. That's what you're talking about. All the accounts paid in full. They're not talking about paying them off. Just paying them in full every month and uh the last uh of the compensating factors is if the borrower has significant income Not reflected in the effective income. So you could have income that they are earning, but you just haven't claimed it for whatever reason, right? Uh, maybe there's some issues with being able to properly document it. Maybe it's not two years of that type of income, whatever it may be that you're not including it on the application, but it is income that they are receiving. That may be used as a compensating factor. Uh, to either basically get this deal approved in the first place or get it approved at the higher DTI that you need. So let's talk about now, this is where I think, um, some people get stuck when they have an automated approval on a deal and they run with it, right? Oh, my deal got approved, eligible. And they don't read the small print on the findings, uh, where these will be on there usually, but we're gonna, excuse me, we're gonna go through them now. And these are very important to be on the lookout for because again, this is where some people get stuck. They get that out of approval. They don't read a small print. They run with it. They think they have an approval at 45 percent housing, uh, 45 percent housing expense. It turns around that one or more of these, uh, uh, scenarios is present, which would downgrade the loan to a manual underwrite. The first one, this is the one that's the most common, is that the borrower has 1, 000 or more collectively in disputed derogatory accounts. What exactly does this mean? Well, look through the credit report. And you can see any accounts that in the comments say that they're disputed, right? So, if they're disputed and they're a derogatory account, they're going to be counted in the mix. And then, if the balances of, if the individual balances of all the disputed accounts total a thousand dollars or more, Or if it's just one account that is for 1, 000 or more, then you have to downgrade the approval to a manual underwrite. This is where you, as the MLO, need to make that call. Because if you miss it, and the file gets submitted not as a manual underwrite, then, um, underwriting is going to come back to you with a, uh, uh, with a suspense like, hey, your borrower doesn't qualify your over and see what you can do to restrict to this loan or else we're going to issue a denial because now they're at 3143. Maybe you can provide compensating factors like what we showed in the first slide to get it as high as 40 over 50, but definitely not going to be 45. 9 over 56. 9. So first, uh, important bullet point there is disputed accounts. Second bullet point has to do with credit events, right? So, if the FHA case number assignment date, is within three years of any of the following, then it would have to be downgraded to a manual underwriting. The first one is the date of the transfer of title through a pre foreclosure sale, such as a short sale. So remember FHA case number assignment date within three years of the following. So short sale, the first one, second one, the date of the transfer of title through a foreclosure sale is within three years. Or the date of the transfer of title through a deed in lieu is within three years. So these are all events that will trigger, uh, having to downgrade the approval to a manual underwrite. Another, um, uh, credit event that affects, uh, having to manually downgrade your automated approval findings is the date of the borrower's bankruptcy discharge. As reflected on the bankruptcy documents. is within two years from the date of the case number assignment. So keep in mind here, the case number assignment is the important date here. Another reason to downgrade to a manual would be the mortgage payment history requires a downgrade as defined in housing obligations or mortgage payment history. So we would FHA guidelines for that. But if the credit delinquency exceeds a certain level, Then it has to be underwrite. Another reason to downgrade a file to a manual underwrite is that the borrower has undisclosed mortgage, not reporting on the credit report, but they may be on the hook for it. And last but not least. Uh, this is one that can be very easily missed, but this is one that is probably as almost as common as the disputed accounts one, which is the first one, is that for your self employed borrower. The business income shows a greater than 20 percent decline over the analysis period. So if you're looking at 2022 and 2023 and from 2022 to 2023, the income decline for your self employed borrower by over 20%, then you have to downgrade that file to a manual underwriting. That's pretty scary right there. So again, a lot of reasons here why the file would be downgraded to a manual underwrite. That's the main thing I want you all to concentrate on. And then, on the first slide, where we're talking about, uh, the other reasons why a file would be a manual underwrite. So, does anybody have any questions on manual underwrite? We've been getting a few of these. Uh, please also note that we do have options for For A TBD pre-approval, uh, using manual underwriting, right? So that's a, that, that's a tricky one here.'cause if you do have a borrower that is gonna have to be run through manual underwrite, uh, because you don't get an approval in your automated underwriting, please do not issue a pre-approval letter, right? Unless you actually have a TBD pre-approval. Approval from underwriting, right? So in other words, you got your manual underwrite file, you run it through automated underwriting, you don't get the approve eligible, what do you do? Well, what you do not do is you do not issue a pre approval letter for a file that came back with a refer finding just because the, uh, the lender tells you we can submit it to manual underwrite. Submitting it and having it be approved eligible is two different things. That just means they say, Hey, send it over and we'll take a look at it. So, again, if it's manually right, do not, uh, issue the pre approval letter until you have submitted the file for a TBD pre approval submission to the lender of your choice to see, uh, if it was approved, uh, credit and income. And then, We would be able to issue that preapproval letter to our borrower because they are now credit and income preapproved. All we need is an executed contract and a property address so that we can fully and officially have the file disclosed by the lender. So that's a really critical point there. TBD preapproval on an FHA manual underwriting. So, um, give it another minute. See if there's any questions. I don't see any questions out there and there should be because manual underwrite is not an easy topic and, uh, you know, needs to be used. One of the things I wanted to know on manual underwrite that will affect being able to submit for manual underwriting is derogatory credits within the last two years. very much. Excuse me, the last 12 months, excuse me, within the last 12 months. Now, one other thing you got to note is FHA will have their standard guidelines on manual underwriting. But please also note that the lenders where you are going to be submitting these files may also have overlays. Right. An overlay is an additional restriction that they may be putting on the situation on the scenario. So they may say, we're only going to manually underwrite, uh, borrowers with a 640 or higher credit score, for example, they may, they may, they may put restrictions like that, as well as they may put additional restrictions, uh, overlays on, you know, when they will accept, manual underwriting. So again, covered quite a bit of information here, giving it another minute to see if anyone has any questions, because if not, then, uh, we will be done for today. And tomorrow's training is on, uh, analyzing, uh, C corporations, self employed borrowers who are structured as a C corp, which is an actual corporation corporation. So, no questions as I can see. So, thank you all for tuning in. And I will see you tomorrow for analyzing a self employed borrower who is structured under a C Corp. Have a great day everybody.