Helpful Tips When Submitting FHA Loans for Manual Underwriting

Written By: Stacey Sprain

• Manual ratio guideline is 31/43. If going higher, make sure you present the necessary compensating factors to justify! (See list of HUD-recognized compensating factors below)

• Always provide a cover letter to underwriting explaining the negatives but offsetting with positive compensating factors. Explain and point out to underwriting why they should approve the file.

• Make sure the 1003 is complete and thorough. Complete addresses need to be listed for employers and banks, employment position needs to be listed, job time, to and from dates should be listed in chronological order – most recent to least recent. Make sure the residence history is listed for ate least 2 years and compare to addresses listed on the borrowers credit report.

• Clean up credit prior to submission. Have duplicate accounts removed, obtain updated ratings and balances for outdated accounts and obtain satisfactions for old judgments that have been paid off. If using non-traditional credit to strengthen or build credit have a verification of rent and non-traditional trade lines added directly to the credit report.

• Provide a letter of explanation for all derogatory credit. Make sure the letter of explanation is thorough, make sure it is valid and makes sense based on the derogatory credit reflected.

Example – if borrower explains derogatory credit were the result of medical issues but there are no medical related or referenced accounts on the credit report, you may need to request and gather additional documentation or data to back up the letter of explanation.

• Provide VOR to verify the past 12 months rent paid timely.

• Evaluate the current versus proposed housing expense to determine any significant increase in proposed housed expense and ask the borrower to address his/her plan to accommodate the higher housing expense with a ‘budget letter’.

• Verify any and all possible reserves.

• Do not submit bank statements with negative balances or NSFs reflected on them.

• Make sure you gather and submit complete full documentation to meet guideline requirements.

• For first time homebuyers it’s always helpful to present a certificate of completion verifying borrower has completed a homebuyer education course.

Remember that the goal of your submission for any manual underwrite is to prove the stabilized financial status of the borrower for the past 12-24 months and that they have recovered from any past periods of derogatory circumstances.

Compensating Factors Recognized by HUD

• The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly expense for the new mortgage over the past 12-24 months.

• The borrower makes a large down payment (ten percent or more) toward the purchase of the property.

• The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.

• Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.

• The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.

• The borrower has substantial documented cash reserves (at least three months worth) after closing.

• The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations).

• The borrower has a potential for increased earnings, as indicated by job training or education in the borrower’s profession.

• The home is being purchased as a result of relocation of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment.

About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at:

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