United States

FHA issues new lending guidelines for manual underwriting


The Federal Housing Administration (FHA) has updated the standards that lenders must use when manually underwriting FHA-insured loans. Manual underwriting is used to help qualify borrowers whose characteristics do not fit the standards of FHA’s automated underwriting system. The intention of the updated guidance is to provide lenders with objective standards they can use to assess this type of borrower, as well as compensating factors that can be considered to qualify the applicant. 

A key goal of the initiative is to ensure that the Mutual Mortgage Insurance Fund (MMIF) remains financially sound. By giving lenders a definitive set of underwriting standards, the FHA aims to bring more stability and certainty to the housing market; in the process, it also hopes to improve the financial soundness of the MMIF.

Currently, most FHA-insured loans are evaluated based on the FHA’s TOTAL (Technology Open to Approved Lenders) Mortgage Scorecard, which uses credit scores and other loan factors to rate borrowers. However, TOTAL sometimes delivers a Refer Scoring recommendation to certain applicants. In these cases, lenders must manually underwrite the borrower.

The new standards include:

  • Compensating factors and stretch ratios allowing borrowers to exceed the housing payment and total debt-to-income ratios under certain FHA programs
  • A reduced credit score (from 620 to 580) below which compensating factors may not be cited and the standard ratio guidelines may not be exceeded
  • New standards for borrowers who exceed the 31 percent housing-to-income ratio, yet carry little or no discretionary debt and, therefore, do not exceed the maximum 43 percent debt-to-income ratio
  • An extension of the applicability of these underwriting policies to FHA-to-FHA rate and term refinance transactions and credit-qualifying FHA streamline refinance transactions
  • A restriction of the use of compensating factors to borrowers with credit scores of 580 or higher

Published in the Federal Register on Dec. 11, 2013, the new FHA lending guidelines for manual underwriting can be found here: http://www.gpo.gov/fdsys/pkg/FR-2013-12-11/pdf/2013-29170.pdf. The comment due date is Feb. 10, 2014, with an effective date no earlier than March 11, 2014.