“Understanding Manual Underwriting in 3 Short MinutesDaniel Dobbs2023-05-25T11:53:34-07:00
This is first of two articles for understanding loan approvals.
Post Dodd Frank all institutional lenders impose a “hard” Debt to Income (DTI) of 44% and 620 Fico score requirements for FHA /VA borrowers and many agents are losing out on commissions.
When the loan is declined, agents often receive “that’s FHA or VA rules” with a shrug.
But DTI calculations and Fico minimums are myths because FHA does not impose a “hard ceiling” for debt ratios or a “hard floor” for credit scores.
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The lender is declining the loan, not FHA-VA!
If a borrower can’t fit a computerized underwriting model there is an alternative; a process referred to as “Manual underwriting” (hence referred to as “MUW”).
The process is slower and more tedious so few lenders offer it.
“MUW” involves two senior underwriters (vs.1 typically) reviewing the loan package and “manually certifying” the loan approval.
The manual certification includes an underwriter’s analysis with written personal notes for why the loan is a good risk. The loan is then kicked up the corporate chain of command for 1 last signature & once approved; the agent collects a commission they didn’t expect.
MUW focuses more intensely on the last two years of your buyer’s profile; if your buyer is recovering from either income or credit issues but has “compensating factors” there’s a good chance your file can be approved with either Fico scores as low as 550 OR a DTI as high as 65%.
Compensating Factors
In order of importance the compensating factors for VA/ FHA for a MW transaction:
1) Down Payment: Typically, borrowers get in for the minimum down payment, but if your borrower can put down 10% (or more), agents you may be on the way to a commission check.
2) Liquid Reserves: A borrower may only be putting a minimal down but if they have liquid reserves (401k, IRA, Annuities etc.) reflecting a history of savings, the underwriters will look favorably upon the borrower.
3) High Credit Scores: These can justify an approval with high DTIs
4) Long Job History: Time on the job or in an industry is viewed positively.
5) Rising income: More nuanced! FHA/VA guidelines state a borrower’s overtime/bonus/commissions must be averaged over a 24-month history & ultimately it’s a hard & fast rule for computerized approvals.
But if the borrower doesn’t have a 24-month history, an underwriter may take into account rising income due to a “position change”, a (virtual) strong job market and overtime opportunities
For example: An RN who just got licensed has (virtually) unlimited overtime.
The underwriter may envision the bigger picture: An aging population in our country and there aren’t going to be any less sick and infirmed people in the near or distant future! Loan Approved!
One other note: The situation works in reverse. A marginal buyer, in an industry in decline, whose overtime /bonus/ commissions have been declining for the last years, the issues may “be the last straw” & kill a deal.
6) Payment Shock: If a buyer has been paying a high rent payment (and we can prove there has been no missed payments with a verification of rent from the landlord); a loan with a higher DTI may get approved because the buyer has shown a history of managing a similar payment.
7) History of Savings: Buyers are viewed more positively if they have saved the money (vs. received a gift letter from relatives).
Note: “Verified funds” are shown with 2 months bank statements; if a buyer has received & deposited gift money, prior to those 2 months statements, borrowers look stronger as the funds appear to be their own savings.
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