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FHA, VA and HECM mortgage news. HUD and G i n n i e news also. Originations, servicing and FHA approval.

DTIs Revised on Manually Underwritten FHA Loans

Move expected to reduce lender overlays

Dec. 11, 2013

By Mortgage Daily staff

In an attempt to reduce lender overlays, revised guidelines on debt-to-income ratios have been issued for Federal Housing Administration-insured loans that are manually underwritten .

Most FHA-insured loans are underwritten through automated underwriting systems that are based on FHA's Technology Open to Approved Lenders -- or TOTAL -- Mortgage Scorecard.

But when the TOTAL system delivers a "refer" recommendation, FHA mortgagees are required to manually underwrite the loan application.

Manual underwriting is also required when borrowers were not scored because they lack credit scores.

FHA released the updated lending standards Wednesday in an effort to reduce the number of lender overlays.

Mortgagees are expected to be better able to objectively consider a borrower's risk utilizing a defined set of objective standards and compensating factors.

The new guidelines, discussed in a Federal Register final notice, address high debt-to-income ratios and a lack of financial reserves -- characteristics 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," Federal Housing Commissioner Carol Galante said in a news release. "We hope to bring more certainty to the market by helping lenders apply a set of consistent underwriting standards."

For borrowers with no credit score or scores that are less than 580, DTI ratios cannot exceed 31/43 percent. The threshold credit score was lowered from 620.

However, one exception is borrowers who meet Energy Efficient Mortgage requirements; they are allowed to stretch DTI ratios to 33/45 percent.

If the credit score is at least 580, then the DTI ratio can be as high at 37/47 percent as long as there is one compensating factor.

With at least two compensating factors, these borrowers can have DTI ratios as high as 40/50 percent.

The policies, which previously applied only to purchase financing, has been extended to FHA-to-FHA rate-and-term refinance transactions and credit-qualifying FHA streamline refinance transactions. They don't apply to cashout transactions.

The effective date of the revised guidelines will be specified in an upcoming mortgagee letter, though it will not occur any earlier than Feb. 10, 2014.

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