Loan Officer Training - 11/13/2024 - Understanding FHA Manual Underwriting - Loan Officer Training with The Mortgage Calculator

Episode Transcript
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Restream recording Nov 13, (00:00):
So, uh, so FHA manual underwriting.
is a loan that is manuallyunderwritten by an underwriter
who makes the decision toapprove or deny the loan.
As the name implies, it is notautomated underwriting.
An actual human being has tomake the decision.

(00:25):
So please note the followingscenarios under which a file
must be manually underwritten.
First one would be that you runit through automated
underwriting and you receive arefer.
Whether it be refer with cautionor refer eligible or refer
ineligible, it is still a refer,meaning the system cannot, uh,

(00:51):
fully assess the risk and cannotprovide a findings.
Please also note that a manualunderwrite, and this one is sort
of a redundancy, but it is whenan application is downgraded to
a manual underwrite.
I'm going to get into some ofthe scenarios where they get

(01:14):
automatically downgraded in thenext slide.
And when FHA programs requiremanual underwriting for the
application, depending on.
The program type.
So, the main thing to know whenyou are going to refer a file is

(01:35):
that the PI is reduced.
Because now, remember, we are onmanual underwriting guidelines.
We are not on automatedunderwriting guidelines, which
are totally different, right?
If you send the file Submittedthrough AUS for FHA, it's going

(01:57):
to give you an approval with ashigh of a DTI as 45.
9 on the housing expense and ashigh 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'relooking at maximum housing

(02:21):
expense of 31 percent.
and maximum total debt expenseof 43%.
Total debt is housing expenseplus other debt service.
Now, the DTI can be higher up to40 percent housing expense, 50

(02:43):
percent total debt withcompensating factors.
So, compensating factors thatwe're talking about here.
Uh, first one would be verifiedand documented cash reserves of
three of three months or greaterfor one or two unit property or

(03:06):
six months or greater for threeto four unit property.
And both of these are excludingGifts, right?
Gifts cannot be consideredtoward reserves because a gift
is a gift.
Just like when you're running anautomated underwriting and the
borrower has very little or nomoney of their own and it's all

(03:27):
coming from a gift, then if yourborrower has not so good credit,
you may not get an auto approvalbecause they didn't have enough
of their own money saved up.
The system does, uh, deem themfor not being able to save.
Another compensating factor thatcan allow you to get higher DTI

(03:51):
or just allow the underwriter toapprove the deal, regardless,
would be if there is a minimalincrease in housing expense of
not more than 100 per month or5%.
Whichever is less and no morethan one 30 day late in the last

(04:15):
12 months.
And other compensating factorthat will assist is if the
borrower has residual income.
Now they, uh, FHA does use theVA table for residual income,
depending on the part of thecountry that you're in, uh, keep
in mind, residual.

(04:40):
Minus, uh, the income tax duefor the income of that month.
They're, they're looking at nettotal income minus total fixed
payments, uh, minus, you know,that's housing expense minus,
uh, estimated maintenance andutilities.

(05:02):
minus job related expenses andminus grossed up non taxable
income.
So once you do all thatminusing, you get to a residual
income amount.
And if you're over the residualincome requirement for the area
and based on the number ofmembers in the family, then you

(05:22):
have a good chance.
And another compensating factorfor manual underwriting is No
discretionary debt.
In other words, the housingpayment is the only open account
with a balance not paid offmonthly.
That doesn't mean they can'thave any accounts that they're
making payments on.

(05:43):
That just means that, um, for atleast the last six months, they
have to be able to document thatevery month they pay all their
accounts in full every month sothat the only account left to
pay.
with a balance is the housingexpense because the other ones
paid off would mean you have a300 balance on a credit card

(06:05):
that month you pay the whole 300balance on the credit.
That's what you're talkingabout.
All the accounts paid in full.
They're not talking about payingthem off.
Just paying them in full everymonth and uh the last uh of the
compensating factors is if theborrower has significant income

(06:26):
Not reflected in the effectiveincome.
So you could have income thatthey are earning, but you just
haven't claimed it for whateverreason, right?
Uh, maybe there's some issueswith being able to properly
document it.
Maybe it's not two years of thattype of income, whatever it may
be that you're not including iton the application, but it is

(06:48):
income that they are receiving.
That may be used as acompensating factor.
Uh, to either basically get thisdeal approved in the first place
or get it approved at the higherDTI that you need.
So let's talk about now, this iswhere I think, um, some people

(07:15):
get stuck when they have anautomated approval on a deal and
they run with it, right?
Oh, my deal got approved,eligible.
And they don't read the smallprint on the findings, uh, where
these will be on there usually,but we're gonna, excuse me,

(07:36):
we're gonna go through them now.
And these are very important tobe on the lookout for because
again, this is where some peopleget stuck.
They get that out of approval.
They don't read a small print.
They run with it.
They think they have an approvalat 45 percent housing, uh, 45
percent housing expense.
It turns around that one or moreof these, uh, uh, scenarios is

(07:59):
present, which would downgradethe loan to a manual underwrite.
The first one, this is the onethat's the most common, is that
the borrower has 1, 000 or morecollectively in disputed
derogatory accounts.
What exactly does this mean?

(08:19):
Well, look through the creditreport.
And you can see any accountsthat in the comments say that
they're disputed, right?
So, if they're disputed andthey're a derogatory account,
they're going to be counted inthe mix.
And then, if the balances of, ifthe individual balances of all

(08:41):
the disputed accounts total athousand dollars or more, Or if
it's just one account that isfor 1, 000 or more, then you
have to downgrade the approvalto a manual underwrite.
This is where you, as the MLO,need to make that call.

(09:01):
Because if you miss it, and thefile gets submitted not as a
manual underwrite, then, um,underwriting is going to come
back to you with a, uh, uh, witha suspense like, hey, your
borrower doesn't qualify yourover and see what you can do to
restrict to this loan or elsewe're going to issue a denial

(09:23):
because now they're at 3143.
Maybe you can providecompensating factors like what
we showed in the first slide toget it as high as 40 over 50,
but definitely not going to be45.
9 over 56.
9.
So first, uh, important bulletpoint there is disputed
accounts.

(09:45):
Second bullet point has to dowith credit events, right?
So, if the FHA case numberassignment date, is within three
years of any of the following,then it would have to be
downgraded to a manualunderwriting.
The first one is the date of thetransfer of title through a pre

(10:09):
foreclosure sale, such as ashort sale.
So remember FHA case numberassignment date within three
years of the following.
So short sale, the first one,second one, the date of the
transfer of title through aforeclosure sale is within three
years.
Or the date of the transfer oftitle through a deed in lieu is

(10:31):
within three years.
So these are all events thatwill trigger, uh, having to
downgrade the approval to amanual underwrite.
Another, um, uh, credit eventthat affects, uh, having to
manually downgrade yourautomated approval findings is

(10:54):
the date of the borrower'sbankruptcy discharge.
As reflected on the bankruptcydocuments.
is within two years from thedate of the case number
assignment.
So keep in mind here, the casenumber assignment is the
important date here.
Another reason to downgrade to amanual would be the mortgage

(11:16):
payment history requires adowngrade as defined in housing
obligations or mortgage paymenthistory.
So we would FHA guidelines forthat.
But if the credit delinquencyexceeds a certain level, Then it
has to be underwrite.

(11:36):
Another reason to downgrade afile to a manual underwrite is
that the borrower hasundisclosed 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 veryeasily missed, but this is one

(11:56):
that is probably as almost ascommon as the disputed accounts
one, which is the first one, isthat for your self employed
borrower.
The business income shows agreater than 20 percent decline
over the analysis period.
So if you're looking at 2022 and2023 and from 2022 to 2023, the

(12:23):
income decline for your selfemployed borrower by over 20%,
then you have to downgrade thatfile to a manual underwriting.
That's pretty scary right there.
So again, a lot of reasons herewhy the file would be downgraded
to a manual underwrite.
That's the main thing I want youall to concentrate on.

(12:45):
And then, on the first slide,where we're talking about, uh,
the other reasons why a filewould be a manual underwrite.
So, does anybody have anyquestions on manual underwrite?
We've been getting a few ofthese.
Uh, please also note that we dohave options for For A TBD

(13:07):
pre-approval, uh, using manualunderwriting, right?
So that's a, that, that's atricky one here.
'cause if you do have a borrowerthat is gonna have to be run
through manual underwrite, uh,because you don't get an
approval in your automatedunderwriting, please do not
issue a pre-approval letter,right?

(13:30):
Unless you actually have a TBDpre-approval.
Approval from underwriting,right?
So in other words, you got yourmanual underwrite file, you run
it through automatedunderwriting, you don't get the
approve eligible, what do youdo?
Well, what you do not do is youdo not issue a pre approval

(13:50):
letter for a file that came backwith a refer finding just
because the, uh, the lendertells you we can submit it to
manual underwrite.
Submitting it and having it beapproved 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 manuallyright, do not, uh, issue the pre

(14:12):
approval letter until you havesubmitted the file for a TBD pre
approval submission to thelender of your choice to see,
uh, if it was approved, uh,credit and income.
And then, We would be able toissue that preapproval letter to
our borrower because they arenow credit and income

(14:34):
preapproved.
All we need is an executedcontract and a property address
so that we can fully andofficially have the file
disclosed by the lender.
So that's a really criticalpoint there.
TBD preapproval on an FHA manualunderwriting.

(14:54):
So, um, give it another minute.
See if there's any questions.
I don't see any questions outthere and there should be
because manual underwrite is notan easy topic and, uh, you know,
needs to be used.
One of the things I wanted toknow on manual underwrite that
will affect being able to submitfor manual underwriting is

(15:16):
derogatory credits within thelast two years.
very much.
Excuse me, the last 12 months,excuse me, within the last 12
months.
Now, one other thing you got tonote is FHA will have their
standard guidelines on manualunderwriting.
But please also note that thelenders where you are going to

(15:38):
be submitting these files mayalso have overlays.
Right.
An overlay is an additionalrestriction that they may be
putting on the situation on thescenario.
So they may say, we're onlygoing to manually underwrite,
uh, borrowers with a 640 orhigher credit score, for
example, they may, they may,they may put restrictions like

(16:01):
that, as well as they may putadditional restrictions, uh,
overlays on, you know, when theywill accept, manual
underwriting.
So again, covered quite a bit ofinformation here, giving it
another minute to see if anyonehas any questions, because if
not, then, uh, we will be donefor today.

(16:24):
And tomorrow's training is on,uh, analyzing, uh, C
corporations, self employedborrowers who are structured as
a C corp, which is an actualcorporation corporation.
So, no questions as I can see.
So, thank you all for tuning in.
And I will see you tomorrow foranalyzing a self employed

(16:47):
borrower who is structured undera C Corp.
Have a great day everybody.

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

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