Manual underwriting (proposed)
The FHA is considering concrete rules for manual underwriting.
Lenders often use an automated format to evaluate FHA borrowers. But some borrowers who appear risky can make good mortgage candidates when other factors are considered, Bott says.
Old rules: Right now, only general guidelines are in place, Bott says.
Proposed rules: The proposed changes offer specifics. With a FICO score below 620, the mortgage payment could not exceed 31 percent of the gross income; total debt load (including mortgage) couldn't top 43 percent.
Some mitigating factors could help borrowers who don't meet those guidelines:
- Significant additional income not included in gross income.
- Savings equal to three mortgage payments.
- Successful history with similarly sized mortgage or rent payment.
With a 620 score and one mitigating factor, the mortgage could total 35 percent of the gross income; total debt load could go to 45 percent.
With a 620 score and two mitigating factors, the mortgage payment could equal 37 percent of the gross income; total debt load could go to 47 percent.
What you need to know: Explicit manual underwriting standards should encourage lenders to consider potentially solid candidates, Bott says. A decision is likely by year's end.