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Agency specifies ‘compensating factors’ for loans requiring manual underwriting

WASHINGTON, D.C. – December 12, 2013 – (RealEstateRama) — Today, the Federal Housing Administration (FHA) published revised guidelines for lenders when they manually underwrite mortgage loan applications of borrowers applying for FHA-insured mortgages. This change will improve a lender’s ability to objectively consider a borrower’s risk and reduce additional credit requirements or ‘overlays’ that exceed FHA’s own lending standards. Read FHA’s revised manual underwriting standards.

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New manual underwriting requirements announced today are intended to encourage lenders to use a defined set of objective standards and ‘compensating factors’ in order to make responsible, risk-based underwriting decisions. In addition, FHA’s manual underwriting guidance addresses loan characteristics such as high debt-to-income ratios and a lack of financial reserves that can result in high rates of default and foreclosure.

“We want to provide revised guidance for our lenders so that they are confident in offering affordable mortgage loans to responsible borrowers under a reasonable set of guiding principles,” said FHA Commissioner Carol Galante. “We hope to bring more certainty to the market by helping lenders apply a set of consistent underwriting standards.”

Currently, most FHA-insured loans are underwritten through automated underwriting systems that score applications using FHA’s TOTAL (Technology Open to Approved Lenders) Mortgage Scorecard. The TOTAL Mortgage Scorecard evaluates borrowers based on credit scores and other loan factors. When TOTAL delivers a Refer scoring recommendation or when borrowers were not scored because they do not have credit scores, lenders are required to manually underwrite the borrower. Specific policy revisions included in this regulation are reserve requirements for all manually underwritten borrowers, establishing maximum qualifying ratios based on credit score and compensating factors; and providing a revised list of acceptable compensating factors with objective documentation requirements for assessing these factors.

FHA will shortly publish a Mortgagee Letter that will provide additional operational information for lenders.


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Lemar Wooley
(202) 708-0685