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New 2019 FHA Manual Underwriting Guidelines – What You Need to Know!

A manual underwrite by FHA standards is when a loan applicant cannot obtain an Approve/Eligible status through the AUS (Automated Underwriting System) and was considered a Refer or the application was downgraded to a manual underwrite by the FHA underwriter, or the FHA program requires a manual underwrite by mere virtue of the program.

At times a loan applicant will receive an “Refer” from the AUS for numerous reasons such as low FICO score, length of time from a previous bankruptcy or foreclosure or lack of strength from the applicant’s overall credit.   In either of these cases the loan will require a “manual” underwrite.

There are four main areas of concern with a “manual” underwrite a loan applicant must address: Credit, Income, Assets and Compensating factors.


Creditworthiness is a major consideration for “manual” underwrites. A loan applicant can be down graded from an AUS Accept to a manual underwrite by the FHA underwriter. It is through careful reconstruction of the applicant’s credit that they can be approved.

There are two types of credit histories; Traditional credit which requires a tri-merged credit report or residential credit report (not which includes all credit reported to the 3 major credit repositories.  Second, is Non-Traditional credit which is used when a loan applicant does not have enough credit to render a credit score.  In these cases, a credit history will need to be created from various credit sources and references.  (IMPORTANT NOTE READER: 12-month rental history is required for the previous 12 months as well as two other credit references verified such as telephone or utility payments).

What is considered Satisfactory Credit?

There are “specific” credit requirements established by FHA/HUD per 2019 4000.1 guidelines.To access the HUD Handbook 4000.1 click here.

A loan applicant cannot have any late payments in the past 12 months for any mortgage or installment payments and a maximum of 2 late payments in the past 24 months for any revolving credit cards and the later can only be two times 60 days late in the past 12 months.(IMPORTANT NOTE TO READER: A loan applicant will need at the very minimum to explain in detail any non-satisfactory credit.  Considerations should be given to extenuating circumstances such as illness or death (divorce is not an extenuating circumstance)).

Do collections or charge offs affect “manual” underwriting considerations?  The answer is “Yes”.  A collection refers to a shift of a past-due account into a collection to a collection agency.  A charge off refers to a debt that has been written off by the creditor.  (IMPORTANT NOTE TO READER: Collections while not paid may need to be included in the applicant’s debt-to-income ratios.  Extenuating circumstances should be used to explain collections and charge offs).


Income is generally referred to as “effective” income.  “Effective” income is income earned by the loan applicant that is documented, be legal, likely to continue for 3 years and is reported to the IRS when required.  Stability of employment is a major reason why some Accept/Eligible AUS borrowers must get down graded to a “manual” underwrite(IMPORTANT NOTE TO THE READER:  Applicants who changed jobs more than three times in the previous 12 months that cannot provide proof of continual wage increases during this time frame or training and education transcripts for a new position require a “manual” underwrite down grade).


Assets are generally defined as cash or cash equivalents that can be readily converted to cash.  All FHA loans require source and seasoning of all large deposits (greater than 1% of the loan amount).  The minimum statutory investment or 3.5% must be proven on all FHA loans.  (IMPORTANT NOTE TO READER: All manually underwritten loans must have at least 1-month reserve after the required cash to close for any single-family residence and 2-unit property and 3 months reserves for any 3 and 4 unit properties.)  Reserves are equal to the total amount of principal, interest, taxes and insurance.


Compensating factors are specific loan factors considered by the FHA/HUD Direct Endorsed underwriter with minimum credit scores that allow a loan applicant to go above the standard debt-to-income ratios of 31% for the primary housing ratio and 43% for the total debt to income ratio.  Applicants with a credit score below 580 or who utilize non-traditional credit are limited to a 31% housing ratio and 43% total debt-to-income ratio. Applicants with a credit score above 580 with one compensating factor (mortgagee letter 2014-02) are allowed higher debt-to-income ratios of 37%/47%.  Applicants with a 580 and above credit score with two compensating factors will be allowed ratios up to 40%/50%.

Applicants with a minimum 580 score and no discretionary debt are allowed a 40%/40% debt-to-income ratios.  (IMPORTANT NOTE TO READER:  New FICO simulation and rapid rescore models can be utilized by the loan applicant to increase their credit scores to allow a “manual” credit underwrite as well as AUS approval). While “manual” FHA underwrites can seem mysterious at times if not difficult to understand, these guides have been provided to allow for almost every person seeking homeownership to buy.  Choosing a direct lender with no FHA, VA, or USDA overlays is critical to your loan success! Contact us now!