Manual mortgage underwriting refers to the process of evaluating a mortgage application without solely relying on automated systems or algorithms. In manual underwriting, a human underwriter carefully assesses the borrower’s financial situation, credit history, income, assets, and other relevant factors to determine their eligibility for a mortgage loan.

This process involves a thorough review of the borrower’s documentation, including pay stubs, tax returns, bank statements, and other financial records. The underwriter may also consider factors such as employment history, debt-to-income ratio, and any extenuating circumstances that may impact the borrower’s ability to repay the loan.

Manual underwriting is typically used in situations where borrowers have non-traditional income sources, lower credit scores, or other factors that may not fit within the criteria of automated underwriting systems. It allows for a more flexible and personalized approach to assessing a borrower’s creditworthiness and risk profile. However, manual underwriting can be more time-consuming and may require additional documentation compared to automated underwriting processes.

MANUAL UNDERWRITING INCOME TO DEBT RATIOS

Income-to-debt ratios, often referred to as debt-to-income (DTI) ratios, are financial metrics used by lenders to assess a borrower’s ability to manage their debt obligations relative to their income. There are two main types of DTI ratios:

  1. Front-end DTI ratio: This ratio compares a borrower’s housing expenses (such as mortgage principal and interest payments, property taxes, homeowner’s insurance, and homeowner’s association fees) to their gross monthly income. It is calculated as follows:Front-end DTI ratio=Total monthly housing expensesGross monthly incomeFront-end DTI ratio=Gross monthly incomeTotal monthly housing expenses​
  2. Back-end DTI ratio: This ratio considers all of a borrower’s monthly debt obligations, including housing expenses and other recurring debts such as credit card payments, car loans, student loans, and other personal loans, in relation to their gross monthly income. It is calculated as follows:Back-end DTI ratio=Total monthly debt paymentsGross monthly incomeBack-end DTI ratio=Gross monthly incomeTotal monthly debt payments​

In today’s market and higher interest rate environment we are experiencing more challenges with loan files that need creativity and know how to provide mortgage financing for those who qualify and deserve to be in a home.

One of the most common questions I get is on DTI ratios for manual underwrites so I figured I would chat about this today.

FHA RATIOS

The standard manual underwrite FHA ratio is 31/43. The 31% is your front-end ratio also known as your housing ratio and the 43% is when you put all of your monthly debt in and divide by your gross income.

If you have a no score or less than a 580 score you cannot go higher than 31/43. If you have a borrower with a score and a co-borrower with no score you CAN use the alternate DTI options.

If you have compensating factors you can go above the 31/43% ratios.

  • 1 Compensating Factor = 37/47 ratios.
  • 2 Compensating Factors = 40/50 ratios.
  • If mtg is only debt & no other open debt but has score = 40/40 ratios.

Compensating Factors Are:

  • 3 months cash reserves from their own funds.
  • Passes residual income test.
  • New housing payment not more than $100 or 5% of current housing payment.
  • New construction homes with EEH energy codes.

VA RATIOS

VA manual underwriting ratios will vary by lender. Some lenders max at 41% as that is where VA requires additional residual income.

VA does not have a posted max ratio for manual, so it is lender discretion.

We use 50% as the standard for max manual ratios but will consider a higher amount based on the situation. For example, if a Veteran is selling a home after they purchase this one and we are hitting them for both mortgages, and they have plenty of assets and good credit then we would likely go higher. Or proof of a spouse’s income we are not using that would make sense as well. It depends on the storyline, but our standard is 50%.

USDA RATIOS

USDA standard manual ratios are 29/41.

USDA has what they call a debt ratio waiver. If you meet below requirements you can go to 32/44 ratios.

You Need The Following

  • 680 or higher score for all borrowers
  • PLUS 1 Of These Three
    • 3 months cash reserves from their own funds
    • All employed borrowers have been on your current job for 2 years. Allowed for SS or retirement as well. S/E not eligible.
    • Minimal increase in housing payment

FYI, if the file requires non-traditional credit, then you cannot use the debt ratio waiver.

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