“Manual underwriting” refers to the process of assessing a borrower’s creditworthiness and making lending decisions based on a thorough review of their financial history, income, assets, and other relevant factors, without relying solely on automated algorithms or credit scoring models.

Debt ratios, also known as debt-to-income ratios (DTI), are financial metrics used by lenders to assess a borrower’s ability to manage additional debt obligations relative to their income. These ratios are crucial factors in determining a borrower’s creditworthiness and eligibility for loans, particularly in mortgage lending.

In today’s market and higher interest rate environment I think we have all experienced tougher 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 Debt to Income ratios for manual underwrites.

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 can 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 their current job for 2 years. Allowed for SS or retirement as well. S/E not eligible.
  • Minimal increase in housing payment

While manual underwriting can be more time-consuming and labor-intensive compared to automated underwriting, it offers flexibility and the potential to approve borrowers who may be overlooked by traditional credit scoring models. It’s commonly used in mortgage lending, especially for non-conforming loans or loans with alternative documentation requirements.

Lenders use DTI ratios alongside other factors such as credit history, employment stability, and down payment amount to assess a borrower’s overall financial health and make informed lending decisions. It’s important for borrowers to understand their DTI ratios and work to keep them within acceptable limits to improve their chances of loan approval and favorable loan terms.