Freddie Mac Guidelines For Reserves On Manual Underwriting

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FHA Manual Underwriting Mortgage Guidelines And Requirements

This BLOG On FHA Manual Underwriting Mortgage Guidelines And Requirements Was UPDATED And PUBLISHED On August 20th, 2019

Freddie mac guidelines for reserves on manual underwriting insurance

FHA Manual Underwriting Mortgage Lending Guidelines And Definition Of Compensating Factors Explained

Minimum amount of reserves requiring verification and returns this information on the Loan Product Advisor Feedback Certificate (Feedback Certificate). For complete information on reserve requirements, refer to Freddie Mac’s Single-Family Seller/Servicer Guide (Guide) Section 5501.2. What Are Reserves?

There is no dead set in stone requirements with FHA Manual Underwriting Mortgage Guidelines. Manual Underwriting is when a mortgage loan application cannot get an approve/eligible per Automated Underwriting Systemand the Automated Underwriting System yields a referred/eligible per Automated Findings.

Freddie Mac Underwriting Guidelines Matrix

  • Referred means that the automated system cannot issue an automated approval with the information
  • The data entered in the automated approval system cannot render an automated underwriting system approval
  • Eligible means that the mortgage loan application is eligible for a mortgage loan approval
  • Refer means that the file needs to be referred to a human mortgage underwriter

What Does Manual Underwrite Mean

Manual Underwriting means that the mortgage file is assigned to a mortgage underwriter and has to be manually underwritten by a human underwriter:

  • The mortgage underwriter will review the whole mortgage loan application
  • The underwriter will look for derogatory credit information
  • They will analyze the credit risk surround the derogatory credit items and look for compensating factors which are positive factors
  • Examples of compensating factors are
    • Reserves
    • Low payment shock through verification of rent
    • Longevity in the job, larger down payment
    • Additional income not used as qualified income
    • Part-time income borrower has for at least a year but not used as qualified income
    • Other positive factors that show the strength of the mortgage loan borrower
  • Lenders view lower credit score borrower’s as higher risk
  • Under 620 credit 2019 FHA manual underwriting mortgage guidelines state that the mortgage underwriter has discretion in assessing the risk of the borrower when deriving to a decision on whether to issue a mortgage loan approval or not

Requirements With 2019 FHA Manual Underwriting Mortgage Guidelines

There are no specific requirements with 2019 FHA Manual Underwriting Mortgage Guidelines and a lot of deciding factors relies on mortgage underwriter discretion.

  • One of the most important factors most mortgage underwriters require is rental verificationand less than 5% payment shock or $100 increase from the rental expense to new housing payment, whichever is less
  • Rental verification is only valid if the renter can provide 12 month’s canceled checks where he or she has paid their rental payments with a bank check
  • The renter can also provide 12 month’s bank statements if they have paid it online
  • Cash rental payment does not count as verification of rent
  • If the renter has leased their apartment or home from a registered property management company, then a verification of rent form provided by the lender to the property management company can be used in lieu of canceled checks and/or bank statements
  • All rental payments in the past 12 months need to have been on time and no 30 day late payments on their monthly rents are allowed

FHA Manual Underwriting Guidelines On Credit Scores And DTI

The lowest credit scores allowed to qualify for a 3.5% down payment home purchase FHA Loan is 580 credit scores.

  • Mortgage lenders like myself have no FHA mortgage lender overlays
  • Manual underwriting mortgage loans with credit scores as low as 580 credit scores
  • However, most lenders do have overlays on credit scores with manual underwriting loans where they want a minimum credit score of at least 640 credit scores

HUD Guidelines On Debt To Income Ratio On Manual Underwriting

Most mortgage lenders normally prefer borrower’s debt to income ratios on manual underwrites at 43% DTI:

  • FHA Manual Underwriting Mortgage Guidelines does have a tier on debt to income caps depending on borrower’s credit scores
  • Compensating Factors will increase debt to income ratio cap requirements
  • I have done and closed on manual underwriting mortgage loan files with debt to income ratios up to 50% DTI
  • However, manual underwriters will look for strong compensating factors when underwriting a manual underwrite

Borrowers who are looking for an FHA mortgage lender with no Lender Overlays specializing in manual underwriting, please contact us at Gustan Cho Associates at 262-716-8151 or text for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take calls and answer any questions.

2019 Update On HUD Manual Underwriting Guidelines

Manual Underwrites are becoming very popular. There are instances where an approve/eligible per AUS FINDINGS loan applicant will get downgraded to a manual underwrite such in cases where there are credit disputes. All manual underwriting require verification of rent.

NEW HUD guidelines on manually underwritten loans

The bullet points below apply to all manually underwritten FHA Loans

HUD Mortgagee Letter 2014-02 RESERVES REQUIRED on all manually underwritten loans.

  • 1 month reserves are required on all 1-2 unit properties on manually underwritten FHA Loans
  • 3 months reserves are required on all 3-4 unit properties with manually underwritten FHA Loans

Debt Ratio Limits On All FHA Manual Underwriting Loans

Automated Approved FHA Loans debt to income ratios are 46.9% DTI front end and 56.9% DTI back end on borrowers with credit scores 620 and higher. Borrowers with credit scores under 620, maximum DTI requirements is capped at 43% DTI for an automated underwriting system approval.

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HUD Manual Underwriting Guidelines

Below is the manually underwritten debt to income ratio requirements PER 2018 HUD GUIDELINES ON MANUAL UNDERWRITING:

  • Borrowers with credit scores under 580 or borrowers who need to be underwritten with non-traditional credit, the maximum debt to income ratio required are 31% front end and 43% DTI back end
  • Borrowers with at least a 580+ credit score with NO compensating factors, the maximum front end debt to income ratio is 31% DTI and 43% DTI back end
  • Borrowers with at least a 580 credit score and ONE compensating factor, the maximum front end debt to income ratio is 37% DTI and maximum back end debt to income ratio is 47% DTI
  • Borrowers with at least a 580+ credit score with TWO compensating factors, the maximum front debt to income ratio is 40% DTI and maximum back end DTI is 50% DTI
  • Borrowers with at least a 580+ FICO credit score with NO discretionary debt, the maximum front end debt to income ratio is capped at 40% DTI and maximum back end is capped at 40% DTI

HUD Guidelines On Compensating Factors

Acceptable Compensating Factors per HUD GUIDELINES are limited to the following:

  • 3 months of reserves for 1-2 unit properties
  • 6 months reserves for 3-4 unit properties
  • The new total monthly mortgage payment is not more than $100 and/or 5% higher than previous total monthly housing payment, whichever is less
  • There is documented 12 monthly housing payment history with no more than one late payment in the past 12 months
  • Cash-out refinance transactions cannot have any late payments in the past 12 months
  • Residual income. (See HUD mortgagee letter 2014-02 for details)
  • Verified and documented significant additional income not considered effective income

All manual underwriting requires timely payments in the past 12 months. Borrowers who need a direct lender with no overlays on FHA Loans and can do manual underwriting on FHA and VA Loans, please contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.

Manual Underwriting Versus Automated Underwriting Guidelines

This BLOG On Manual Underwriting Versus Automated Underwriting Guidelines Was UPDATED On May 23rd, 2019

The Automated Underwriting System is a sophisticated computer system that will render a decision on whether a mortgage applicant is approved for a mortgage loan based on the information from the 1003 and credit reports.

  • The Automated Underwriting System will take into account the mortgage applicants following information:
    • Income
    • Debt
    • Liabilities
    • Assets
    • Credit scores
    • Credit history
    • Public Records
  • Based on the information, the Automated Underwriting System will report its findings and can require conditions like the following:
    • Rental verification
    • Reserves
    • Assets
    • Whether or not gift funds can be used
    • Other mortgage conditions
  • Fannie Mae’s version of Automated Underwriting System is known as DU and Freddie Mac’s version is known as LP
  • Findings from the Automated Underwriting System are rendered as approve eligible, refer eligible, or refer with caution

Difference Between Manual Underwriting Versus Automated Underwriting Is Approve/Eligible Per AUS Findings

Manual Underwriting Versus Automated Underwriting is the Approve/Eligible is rendered on automated underwriting and refer/eligible is rendered on manual underwriting.

  • Refer eligible files are mortgage applications that are eligible for mortgage approval but is not approved due to certain factors that the automated underwriting system cannot render an automated approval
  • A mortgage underwriter needs to carefully review the borrowers file manually
  • Information such as the following needs to be reviewed carefully and analyzed by the underwriter:
    • Credit Scores
    • Overall Credit Payment History
    • Assets
    • Debt to income ratios
    • Other factors that the automated underwriting system cannot render an approve/eligible per AUS

Potential Reason For Refer/Eligible AUS Findings

There are multiple reasons why borrowers do not get an approve/eligible and the AUS renders a refer/eligible:

Freddie Mac Guidelines For Reserves On Manual Underwriting 2017

  • Refer with caution pretty much means a denial due to certain factors that do not meet Fannie Mae, Freddie Mac, or FHA mortgage lending guidelines such as the following:
    • Borrower not having met the mandatory waiting period after a housing event )foreclosure, deed in lieu of foreclosure, short sale)
    • Did not meet the mandatory waiting period after Chapter 7 bankruptcy
    • Other factors that the Automated Underwriting System picked up
  • For files that do not meet automated underwriting system guidelines, the files can be manually underwritten

Manual Underwriting Needs To Go Through Lender Who Does Manual Underwrites

Not all mortgage lenders can do manual underwriting mortgage applications. The Gustan Cho Team at Loan Cabin Inc. is a direct mortgage lender with no overlays on government and conventional loans that are experts in manual underwriting:

  • For those that do, there are more restrictions that apply than automated approved mortgage files
  • Manual underwriting is done for files that cannot get automated underwriting system automated approvals
  • Manual underwriters look for strong compensating factors such as rental verification, reserves, larger down payment, and lower debt to income ratios
  • Manual underwriting maximum debt to income caps can be as high as 50% DTI with compensating factors
  • For mortgage loan borrowers with no credit scores, a manual underwriting mortgage approval process can get them a mortgage approval by using non-traditional credit such as the following:
    • Rental verification
    • Electric bills
    • Water bills
    • Cable bills
    • Internet bills
    • Cellular bills
    • Insurance bills
    • Tuition
    • Other alternative sources
  • The way to prove that is by providing the mortgage underwriter 12 months worth of cancelled checks

Freddie Mac Manual Underwriting Guidelines

VA And FHA Loans During And After Chapter 13 Bankruptcy

Gustan Cho Associates Mortgage Group is a direct lender with no lender overlays on government and conventional loans.

  • A large percentage of our borrowers are folks who are in a Chapter 13 Bankruptcy repayment plan and/or just got their Chapter 13 Bankruptcy discharged
  • Most mortgage lenders have overlays on VA Loans During And After Chapter 13 Bankruptcy and FHA Loans During And After Chapter 13 Bankruptcy
  • The Gustan Cho Team at Loan Cabin Inc. has no lender overlays on Chapter 13 Bankruptcy during and after Chapter 13 Bankruptcy discharge on both FHA and VA Loan Programs
  • Both FHA and VA Loans without two years of seasoning after Chapter 13 Bankruptcydischarged date need to be manually underwritten
  • This is because the Automated Underwriting System will not render an approve/eligible per AUS

Freddie Mac Guidelines For Reserves On Manual Underwriting Form

Qualifying For Mortgage With Direct Lender With No Overlays

Allregs Freddie Mac Underwriting Guidelines

Borrowers who need to qualify for a mortgage with a direct lender with no lender overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays. A large percentage of our borrowers are files that need to be manually underwritten. All of our pre-approvals are TBD Subject Property Mortgage Underwriting so they are full credit approvals that are fully underwritten and signed off by our mortgage underwriters.