Reference Guide · Manual Underwriting Certification Program Reference Guide Bringing Excellence to...

Manual Underwriting Certification Program

Reference Guide

Bringing Excellence to

Serving the Underserved

2 | P a g e ©Carrington Mortgage Services, LLC Mortgage Lending

All rights reserved. Proprietary and confidential. Manual Underwriting Program Version 1 April 2014

Contents

Module 1 – Program Introduction .......................................................................................... 5

Program Objectives ..................................................................................................................... 5

Benefits of Certification .............................................................................................................. 6

How will we Serve the Underserved? ......................................................................................... 6

Module 2 – Which Loans need to be Manually Underwritten? ............................................... 8

Reasons for Automatic Downgrade ............................................................................................ 8

Reasons for Possible Downgrade ................................................................................................ 9

Module 3 – Credit - Getting the Full Picture ......................................................................... 10

Credit Review ............................................................................................................................ 10

Letters of Explanation ............................................................................................................... 11

Supporting Documentation ....................................................................................................... 11

Module 4 – Reviewing Challenged Credit ............................................................................. 12

Indicators of Derogatory Credit ................................................................................................ 12

Judgments and Collections .................................................................................................... 13

Capacity Analysis ................................................................................................................... 13

Tax Liens ................................................................................................................................ 14

Bankruptcy ............................................................................................................................. 14

Foreclosure ............................................................................................................................ 14

Short Sale ............................................................................................................................... 15

Credit Counseling ................................................................................................................... 15

Disputed Accounts .................................................................................................................... 16

Module 5 – Non-Traditional Credit ....................................................................................... 17

Developing Non-Traditional Credit .......................................................................................... 17

Insufficient Credit ...................................................................................................................... 18



Module 6 – Capacity and Income ......................................................................................... 19

How do we Determine a Borrower’s Capacity to Repay? ......................................................... 19

Salaried Borrowers Income Documentation ......................................................................... 19

Self Employed Borrowers ...................................................................................................... 21

Commissioned Income Rule .................................................................................................. 22

Non-Employment Income ..................................................................................................... 22

Documenting Requirements for Non-Employment Income: ................................................ 23

Income Documentation Red Flags ......................................................................................... 24

Module 7 – Debt to Income and Liabilities ........................................................................... 25

Calculating DTI ........................................................................................................................... 25

Debt to Income Rule for Manually Underwritten Loans: ...................................................... 25

Scenarios with a Higher DTI Requirement: ............................................................................... 26

Liabilities .................................................................................................................................... 27

What can be excluded? ......................................................................................................... 27

What Must Be Included? ....................................................................................................... 27

A Word about Student Loans: ............................................................................................... 28

Module 8 – Compensating Factors ....................................................................................... 29

Minimum Requirements ........................................................................................................... 29

Standard Compensating Factors ............................................................................................... 29

Cash Reserves ............................................................................................................................ 30

Documenting Cash Reserves ................................................................................................. 30

Minimal Increase in Housing Expense ....................................................................................... 31

Significant Additional Income ................................................................................................... 31

Residual Income ........................................................................................................................ 32

Calculating Residual Income .................................................................................................. 32

Residual Income Example: ..................................................................................................... 33

No Discretionary Debt ............................................................................................................... 34



Module 9 – The Four Cs of Manual Underwriting ................................................................. 35

Credit ......................................................................................................................................... 35

Capacity to Repay ...................................................................................................................... 36

Cash ........................................................................................................................................... 36

Important Notes about Asset Verification: ........................................................................... 37

Important Notes about Gift Funds: ....................................................................................... 37

Collateral ................................................................................................................................... 38

Module 10 – Successful Loan Submissions ........................................................................... 39

Cover Sheet Memo .................................................................................................................... 39

Manual Underwriting Checklist ................................................................................................. 40

Common Missing Conditions .................................................................................................... 43



Program Objectives

Understand why certification is important:

o To YOUR success - and

o Carrington’s Strategy of Serving the Underserved

Effectively communicate:

o Parameters for manually underwritten FHA loans

o All levels of documentation requirements

Identify which transactions require a manual underwrite

Know the flags that cause a loan to be downgraded

Better understand acceptable credit risk factors

Identify and suggest compensating factors

Understand and calculate residual income

Avoid common conditions and loan delays from the start

Important Note: All guidelines and concepts in this program are intended for

loans being submitted for FHA Manual Underwrite

Module 1 – Program Introduction



Benefits of Certification

• Lead your clients and referral sources to successful loan closings by fully understanding

all aspects of manual underwriting

• Gain the personal confidence needed to effectively communicate with your clients and

internal associates, as we move loans to closing

• Build client confidence, and connection, leading to a larger referral base and pipeline!

• Navigate loans with challenged credit and offer constructive guidance

• Carry out the mission of Serving the Underserved!

How will we Serve the Underserved?

My Loan Detail

Provides borrowers applying for an FHA loan, with a certain credit score threshold, education and easy to understand details about their loan.

• The Completion Certificate ensures every borrower in this category understands exactly how their loan works

• Reduces any confusion or future accusations

• Offers Peace of Mind lending for the borrower and the lender

• Unique to Carrington – proprietary - developed by us!



Marketing Support

We are aggressively building our brand awareness through national advertising, direct mail

marketing and Public Relations

• Bringing new clients to our doors

• Establishing a solid reputation in the market

• Providing collateral and information - setting our clients up for success!

Exceptional Operational Support

• Underwriting - Experienced underwriters that are internally trained and certified to

manually underwrite with the goal of making loans work!

• Sales and Operations Staff - Understand the process and what is required to support our

clients

• Scenario Help Desk - Staffed by senior level underwriters who will offer guidance and loan

structure advice

• Consistency - Training and process implementation across all 4 regional operations centers



Reasons for Automatic Downgrade

When these circumstances exist, a manual underwrite is required:

1. AUS Refer – Refer Eligible or Refer Ineligible

2. Streamline Refinances

3. Any Delinquent Federal Debt

4. Credit Alert Interactive Voice Response System (CAIVRS) Alert

5. Mortgage Payment History is Less than 6 months

6. Credit Score Below 620 with a DTI Ratio in Excess of 43%

7. Paystubs without YTD earnings or are handwritten

8. Late mortgage payments in the past12 months

• If any mortgage trade line, including a mortgage line-of-credit, reflects any combination

of 90 days late:

» 3 or more 30 day late payments; or

» 1 or more 60 day late payments plus 1 or more 30-day late; or

» 1 90 day or greater late payment

9. Disputed Accounts/Collections or Public Records that together have a cumulative balance of

of $1,000 or greater

10. Previous Mortgage Foreclosure - within 3 years

11. Chapter 7 and 13 Bankruptcies

» If discharged less than 2 years from application date

Module 2 – Which Loans need to be Manually Underwritten?



Reasons for Possible Downgrade

There can be certain circumstances in the loan file that the underwriter will need to review

carefully to determine if a manual underwrite is required.

While they are not necessarily an automatic reason for downgrade, they can be flags that cause

the underwriter to consider the impact on the borrower’s capacity to repay or credit

worthiness.

The underwriter has discretion to determine that a manual underwrite is required to ensure a

holistic review of the file and that all of the documentation indicates an acceptable credit risk.

Understanding which circumstances will prompt a closer look, or downgrade the file to

Manual Underwrite, will benefit you and your client, by allowing you to take precautions

before submission.

Things to watch for:

1. Only current trade line is an authorized user account

– Designated by ECOA Code 3 on the credit report

2. Multiple NSFs on bank statements

3. There are Mortgage lates on the VOM for privately financed property not being reported on

the credit report

4. Derogatory credit shown after bankruptcy

5. Judgments appearing on the preliminary title policy, title commitment, or judgment search

that are not on the credit report

6. Mortgages extinguished through foreclosure that have fallen off the credit report or

showing as “unrated”

7. Tax liens not reported on the credit report



Credit Review

We review of the overall credit report and payment patterns

Consider the Hierarchy of Credit Review, which helps establish where to give the most weight

to a borrower’s regard for financial obligations:

1. Previous housing expenses including utilities

2. Installment debts

3. Revolving debts

Establish the borrower’s history of paying their housing obligations:

• Credit Report

• Verification of Mortgage

• Verification of Rent

• Identity of Interest transactions (between family or business relationships) require more

documentation

o Canceled checks for past 12 months

o A letter from homeowner if rent free

o Executed lease

When a credit score is available, it must be used to determine eligibility:

When the Credit Report Reflects:

• Three credit scores (one from each repository) - the middle score is used

• Two credit scores - the lower of the two scores is used

• One credit score - that score is used

When the decision credit score is:

• 580 and above: Maximum FHA financing is available

• 500-579: Maximum LTV 90.00%

Module 3 – Credit - Getting the Full Picture



Letters of Explanation

A Letter of Explanation (LOE) should be provided for all derogatory credit occurring over the

past 24 months

Must contain the following components:

• Be written, signed and dated by the borrower

• The specific account information included for all accounts in question

• Detailed explanation of each event and why they occurred

• Established timeline with dates of the events that caused the delinquency

• The manner and date of resolution – what reversed the crisis?

Supporting Documentation

The borrower must also provide any supporting documentation that establishes the facts and

timeline of the events and resolutions.

Supporting documentation locks down the facts of the explanation and must all work together

to tell a story that makes sense!

Ask “Does the documentation provided support the timeline, incidents and facts offered by the

borrower in their letter of explanation?”

Supporting documentation may include:

• Divorce papers

• Bankruptcy papers

• Copies of paid in full letters

• Copies of doctor’s notes (for disabilities)

• Letters from social services agencies



Indicators of Derogatory Credit

Major indications of derogatory credit such as:

• Judgments

• Collections and Charge Offs

• Tax Liens

• Foreclosures and Short Sales

• Bankruptcy

• Consumer Credit Counseling

• Other recent credit problems and late trends

All of these instances require a letter of explanation and supporting documentation. The

explanation must make sense and be consistent with other credit information in the file such as

the credit report and timeline of events.

By documenting the analysis of the delinquent accounts, we are looking to determine if the late

payments were the result of:

• A disregard for financial obligations

• The inability to manage debt

• Factors beyond the borrowers control or

• Isolated events

Module 4 – Reviewing Challenged Credit



Judgments and Collections

Court-Ordered Judgments:

Must be paid off unless there is an acceptable Repayment Plan with Creditor:

• Documented agreement with creditor to make regular and timely payments

• Payments have been made according to the agreement for at least 3 mos

• The payment must be included in DTI to qualify

Collections are delinquent credit that has NOT gone to court:

• May not be required to be paid in full

• Borrower must explain in writing, all collections

• If collections total more that $2,000, a capacity analysis is required

• Medical collections do not require resolution

Capacity Analysis

A Capacity Analysis includes any one of the following:

1. Paid in full before or at closing:

o Source of funds must be documented

2. Payment arrangement made with creditor:

o Verified on the credit report or letter from creditor

o The payment must be included in DTI to qualify

3. Calculate a payment of 5% for each collection and include in the DTI



Tax Liens

Tax Liens are treated Similar to Judgments: Must document that it is paid off, or in a satisfactory repayment plan:

• Agreement to make regular and timely payments

• At least 3 payments have been made on time according to the agreement

• The payment must be included in DTI to qualify

Bankruptcy

Chapter 13:

Provides repayment of some or all debt

Requirements:

• At least 12 months of timely payments under payout plan

• Permission to enter mortgage transaction

• Complete copy of bankruptcy paperwork

Chapter 7:

Discharges all debt

Requirements:

• Two years since discharge

• Extenuating circumstances may be allowed if over one year from discharge

Foreclosure

Occurs when a borrower cannot pay their mortgage payment over a period of time, and the

creditor must take legal action and possession of property

• A minimum of three years must have elapsed since the recording date finalizing the

foreclosure, or the date the FHA claim was paid.

• Evidence of completion of the foreclosure must be in the loan file. The Credit Report

verifying the foreclosure is not acceptable.

• Extenuating Circumstances may be considered for recovery time less than three years.



Short Sale

Occurs when a property is sold for less than what was owed.

A borrower is eligible for a new mortgage if:

• They were current on the mortgage and all other installment debt at the time of the

short sale

• And all proceeds from the short sale must have served as payment in full

A borrower is NOT eligible for a new mortgage less than three years after a short sale if:

• They pursued a short sale to take advantage of declining market conditions

• Or to purchase a similar or superior property within a reasonable commuting distance at

a reduced price as compared to current market value

• Or they were in default on the mortgage or other installment debt at the time of sale.

Significant extenuating circumstances exception may be considered

Credit Counseling

Borrowers who have gone through credit counseling, or who are still in credit counseling, must meet all requirements:

• One year of the payout plan has elapsed

• The borrower’s plan payments have been made on time and are documented

• The borrower has written permission from the Counseling Agency to enter into the

mortgage transaction



Disputed Accounts

When a borrower disputes an account with the credit reporting agency, the account is not

considered in their credit score.

Examples of derogatory disputed accounts are:

• Charge Offs

• Collection Accounts

• Late Payments within the last 24 months

The Borrower must provide:

• A Letter of Explanation about the dispute

• Documentation supporting the basis of the dispute

* Important Note - Disputed accounts are cause for downgrade to manual underwrite.



Developing Non-Traditional Credit

Non-traditional credit must be developed for a borrower without a traditional credit history

Non-Traditional Credit may not be used in the following scenarios:

• To offset derogatory credit references on the traditional credit report

• If a usable credit score was obtained.

Once an attempt to verify traditional credit has been made, non-traditional credit references

may be obtained in one of two ways:

• Through a non-traditional mortgage credit report from a credit bureau (preferred)

• Verification of credit reference directly from the creditor (VOL, VOR, VOM)

There are two types of acceptable Non-Traditional Credit:

Group 1: Housing Related

Group 2: Insurance, Cell Phone, Day Care

To qualify a borrower with Non-Traditional Credit, we must have:

• Minimum 3 references each rated for 12 months

• No history of delinquent housing payments

• No more than 1 X 30 day late on any consumer debt

• No collections (other than medical), charge-offs, or public records filed in previous 12 months

Non-traditional credit references can include but are not limited to:

• Rental housing payments from independent source (landlord)

• Utility company references

• Insurance premiums not payroll deducted

• Child care payments made to a business

• School tuitions

Module 5 – Non-Traditional Credit



Non-traditional credit references must contain the following:

• Date completed

• Creditor name

• Balance

• High credit

• Payment amount and frequency of payment

• Date credit established

Insufficient Credit

Insufficient Credit occurs when:

1. Does not have a reported credit score

2. A borrower has no established housing references from group 1

To qualify a borrower with insufficient credit they must have:

• No major adverse credit

• Minimum 3 non-traditional references from Group 2

• All their own funds for the transaction

• 1 month reserves for 1-2 unit properties (3 months for 3-4 units)

Special note – non-occupying co-borrower’s income cannot be used to qualify



How do we Determine a Borrower’s Capacity to Repay?

We must ensure that we have enough evidence to support that the borrower is financially

capable of making the new payment

We analyze their employment, income, debt and assets by looking at:

• Job stability and Continuance (2 year history)

• The amount of income we can use to qualify

• Debt to Income Ratio

• Residual Income

• Cash Reserves

We should always seek to understand the following:

• Is there a 2 year history of continual employment that is likely to continue?

• Is the income source reliable?

• Is the income feasible in relation to the borrower’s monthly obligations?

• Is there an increased earnings potential?

Salaried Borrowers Income Documentation

The file must have:

• Written or electronic VOE

• Most recent 30 days of paystubs

• W-2s for previous two years

OR

• Verbal VOE

• Most recent 30 days of paystubs

• W-2s for the previous two years

• Signed IRS form 4506T for two previous tax years

Module 6 – Capacity and Income



*Military discharge papers and college transcripts may also be used to establish a two year

history

When reviewing income documentation, certain data points should be checked and action

may be required:

What to Look For: What to Do:

Name Compare to 1003 and 3rd

party doc to ensure a match

Social Security Number Compare to 1003 and 3rd

party doc to ensure a match

Pay Period Ensure you have consecutive paystubs

Use to determine how much borrower is paid

Year to Date Income

Match against base pay and W2

Check for variance from other docs

If any variance, have explained

Deductions, Repayments,

Garnishments Include as a liability on 1003 and DTI

Additional Income not disclosed

but may be needed to qualify

Determine the source of income, i.e. bonus, OT, shift

Calculate monthly average using YTD

Compare against W2

Employer Info Compare to 1003 to ensure a match

W2: Employer and Employee Compare to 1003 for name and address match

W2: Social Security Number Ensure a match with 1003 and paystub

W2: Annual Income Make sure it is in line with YTD on paystub

Dates of Employment noted on all

documents

Any gaps or discrepancies must be explained and

makes sense

Income on VOE and supporting

documentation

Any discrepancies in income amounts on supporting

documentation must be explained and documented



Self Employed Borrowers

To determine if the borrower’s business is expected to generate sufficient income for their

needs the lender must carefully analyze:

• The business’ financial strength including the source of business income

• The general economic outlook for similar businesses in the area

Any trend of Declining Income is typically not acceptable for qualifying unless it is reasonably

explained and documented to show that:

• The decline was due to an exceptional non-recurring event

• Does not impact the borrower’s potential for future earnings

Documentation requirements based on business structure:

Type of Business: What to Document:

Sole-Proprietorship/ Independent Worker

Most recent two (2) years Tax Returns

Profit and Loss Statement and Balance Sheet

1099 Forms

Year to Date paystub covering the most recent 30 days

Copy of current contract

Reasonable expectation that income will continue for at least three (3) years

Corporation

Most recent two (2) years personal tax returns

Most recent two (2) years corporate tax returns


Business credit Report

Partnership

Most recent two (2) years personal tax returns

Most recent two (2) years partnership tax returns

Include all K-1 forms


Business credit Report



Commissioned Income Rule

When commissions earned represent 25% or more of the annual income, we must obtain

additional documentation to accurately average income:

• Salaried employee documentation requirements apply

Plus

• Most recent two years of personal tax returns

• Commission income will be averaged over the past 2 years

• Form 2106 to review for unreimbursed business expenses

• Unreimbursed expense will be averaged and subtracted from gross income

Non-Employment Income

Many non-employment related income sources are non-taxable and therefore are eligible to be

grossed up.

Guidelines to consider with non-taxable income:

• Do not assume all retirement income is non-taxable

• For sources other than social security, document the taxing status

• The percentage of non-taxable income that may be added, cannot exceed the

appropriate tax rate for the income amount

• Allowances for dependents are not acceptable

• If the borrower is not required to file a federal return the rate to use is 25%



Documenting Requirements for Non-Employment Income:

Alimony/Child Support:

• Documented consistent receipt for the past 12 months

• Expected three-year continuance

• Copy of the divorce decree or payment agreement is required

• May be grossed up using the borrower’s previous year tax rate

Pension/Annuity/Disability:

• Verification of receipt

• Expected three-year continuance

• Verification from the source or last two years of tax returns

To Document Social Security, we must have one of the following:

• Federal Tax Returns

• Bank Statement showing receipt of funds

• Proof of Income Letter or Social Security Benefit Statement

• SSA- 1099/1024S

Important Notes about Social Security received for reasons other than retirement:

• The SSI must be documented to continue for three years

• If the income will not continue for three years, it can only be used as a compensating

factor

• Pending or current re-evaluation of medical benefits is NOT an indication that the

benefit will not continue



Income Documentation Red Flags

When reviewing all income documentation, be alert for the following indications that

something may need a closer look:

Missing borrower and or employer name

Missing or inaccurate addresses

Personal information not in agreement with other documentation

Inconsistent income based on type of employment such as bonus or income increases

as compared to W2s, 1099s, or 1040s

Handwritten checks

Hand written tax returns that are prepared by a professional preparer

Typed W2s paired with computer generated paystubs

Unsigned and undated tax returns

Dates or pay period inconsistent on paystubs



Calculating DTI

Debt to Income Ratio, or DTI, is the calculation we use to help us analyze the borrower’s

financial ability to repay

Divide the total amount of required monthly payments plus the anticipated new mortgage

payment (PITIA)*, by the amount of qualifying monthly income.

Debt to Income Rule for Manually Underwritten Loans:

Traditional credit + NO compensating factors = 31% front 43% back MAX DTI

Module 7 – Debt to Income and Liabilities

Debt to

Income

(DTI)

*PITIA = Principle + Interest + Taxes + Insurance + Homeowners Association



Scenarios with a Higher DTI Requirement:

In certain scenarios, the addition of Compensating Factors allows us to make exceptions

Credit score is: Compensating Factors: Max DTI Allowed:

>= 580 Strong Cash Reserves 37/47

Minimal Housing Increase

Strong Residual Income

>= 580 Min 6 mos individual trade lines 40/40

With evidence showing revolving paid in full

No debt outside of PITIA

>= 580 Strong Cash Reserves 40/50

Minimal Housing Increase

Significant additional income

Strong Residual Income

Important Note: Borrowers with Non-Traditional or Insufficient Credit or FICOs below 580

cannot exceed the standard DTI requirement of 31/43% regardless of compensating factors.

Need ONE of

Need ALL of

Need TWO of



Liabilities When reviewing liabilities to include in our DTI calculation, be sure:

• The information on the credit report is carried over and documented accurately on the 1003

• Any other credit such as private loans or new accounts, noted on the 1003, but not showing on the credit report, is verified and included

It’s important to understand what liabilities must be included, or can be excluded when calculating DTI:

What can be excluded?

• Authorized User Accounts

• Co-signed Accounts

o If a 12 month history of being paid by the other obligor can be verified

• Court Ordered Assignment of a Debt to a Former Spouse

o If the divorce decree and evidence of transfer of ownership is provided

• A Mortgage Assumed by Another Party

o Legal assumptions only!

o If the mortgage assumption provides a release of liability clause

o Or a 12 month satisfactory payment history is documented

What Must Be Included?

• Leased Vehicles – regardless of the term left on the lease

• Payments from Business Debt in the Borrower’s Name

o Unless the borrower can provide evidence the obligation is paid from company

funds, such as 12 months canceled checks and a satisfactory credit rating

o A sole proprietor filing a Schedule C must always include business debt

• Credit Report Trade Lines with no Minimum Payment Due

o Include 5% of the balance or $10 – whichever is greater

o A statement reflecting terms or minimum payment due is acceptable



A Word about Student Loans:

Deferred student loans are not included in the DTI ratio if the deferment is verified to last at least 12 months beyond the closing date.

Loans in Forbearance are not part of this rule!

• It’s important to know that loans in Forbearance are reviewed on a case by case basis and could disqualify the borrower.

If a borrower is currently delinquent on their federal student loan, they are not eligible for an FHA loan until:

• The loan is brought current paid or satisfied

• A satisfactory repayment plan is in place



Minimum Requirements

There are two requirements for every manually underwritten loan that, also act as compensating factors, when bolstered:

1. Cash Reserves - Every manually underwritten loan requires 1 or 3 months of cash reserves to qualify, depending on the number of units on the property

2. Residual Income - Every manually underwritten loan must meet the minimum residual income limits outlined on the residual income chart

Standard Compensating Factors

Loans that are manually underwritten usually need 1 or more compensating factors to strengthen chances of loan approval

Acceptable compensating factors per HUD are:

1. Strong Cash Reserves

2. Minimal Housing Increase

3. Significant Additional Income

4. Strong Residual Income

Module 8 – Compensating Factors



Cash Reserves

Cash Reserves demonstrate the borrower’s ability to save, and cover expenses should unexpected problems arise.

Cash Reserves Manual Underwrite Minimum Requirement:

• Reserves must be greater or equal to 1 total monthly mortgage payment (PITIA) for 1-2 unit properties

• Reserves must be greater or equal to 3 total monthly mortgage payments (PITIA) for 3 – 4 unit properties

Strong Cash Reserves as a Compensating Factor:



Documenting Cash Reserves

Standard Depository Accounts are verified by:

• Verification of Deposit (VOD)

• Two months of bank statements with a beginning and ending balance

• If only an ending balance is provided then three months are required

Assets that can not be considered as cash reserves include:

• Gifts

• Equity from another property

• Borrowed funds

• Cash received at closing

Retirement accounts such as, IRA, Thrift Savings Plan, 401k, and Keogh can be used as cash reserves, if:

• Only 60% of the vested amount of the account, less any outstanding loans, is used

• The most recent statement is provided

• Evidence is provided that the retirement account allows for withdrawals in cases other than employment termination, retirement, or death

• Any funds used for loan closing are subtracted from the amount included as reserves



Minimal Increase in Housing Expense

We can demonstrate a borrower’s ability to manage the new mortgage payment by

documenting limited payment shock.

Can be used as a compensating factor when:

• The new total monthly mortgage payment does not exceed the current total monthly

housing payment by more than $100 or 5%, whichever is less.

• There is documented 12 month housing payment history with no more than 1X30 late

payment.

• In cash-out transactions all payments on the mortgage being refinanced must have been

made on time for the previous 12 months.

*If the borrower has no current housing payment, this cannot be used as this as a compensating

factor.

Significant Additional Income

Income not reflected in gross effective income, but has a documented history and likelihood

of continuance is considered additional income.

It typically is received as a result of bonuses, overtime, part-time, or seasonal work.

It can be used as a compensating factor under the following conditions:

• Documented received for at least 1 year

• Will likely continue

• Would reduce qualifying ratios to not more than 37/47 if included in gross

• Is considered only in conjunction with another compensating factor when qualifying

ratios exceed 37/47 but not more than 40/50

*Note: Income from non-borrowing spouses or other parties not obligated for the mortgage

is not considered additional income.



Residual Income

Residual Income helps us to evaluate how much money the borrower has left over each month, after:

• Paying all Required Monthly Payments

• Standard Housing and Maintenance Expenses

• Considering the Size of their Household

• Considering the loan amount and geographic region

Meeting the residual income limits is required for all manual underwrites.

However, it may be used as a Compensating Factor as long as it is reasonably higher than the minimum required on the residual income table.

Calculating Residual Income

1. When determining Residual Income requirement, we must count all members of the household without regard to their relationship, or ownership in the property.

2. Qualifying Income Calculation: a. PITIA (total housing payment) b. Federal State FICA and SS income taxes c. Revolving and Installment Debt d. Monthly Maintenance Calculation (.14 cents per square foot) e. = Residual Income (must meet or exceed the chart requirement)

3. Compare to the Residual Income Chart for Region, Price and Family Size



Residual Income Example:

Income Taxes $ 980

Proposed PITIA: $1,500

Total Monthly Obligations: $1,050 = $3,852

Maintenance Costs 2300 SQ FT $ 322

(2300 X.14 cents per square foot)

Monthly Income = $6,500

Minus Total Obligations = $3,852

Residual Income = $2,648

Determine Residual Income limit for a Family of 4, home price 250,000 in California:

The residual income amount of $2,648 meets our minimum requirement of $1,117.

Additionally it exceeds the requirement by a reasonable amount and can also be a

compensating factor for the loan file.



No Discretionary Debt

No Discretionary Debt can be used as a compensating factor ONLY when all three of these

factors are present in our loan file:

• The borrower’s housing payment is the only open account with an outstanding balance

that is not paid off monthly; and

• The credit report shows established credit lines in the borrowers name open for at least

6 months; and

• The borrower can document that these accounts have been paid in full monthly for at

least the past 6 months

*Note - It is important to validate the accounts are in the borrowers name – if they are only an

authorized user they will not qualify!



When preparing a loan file for submission to manual underwriting, it’s important to consider

the file in its entirety and the story it conveys.

Consider the 4 C’s of Manual Underwriting:

1. Credit

2. Capacity to Repay

3. Cash

4. Collateral

Credit

Areas of the loan file that need to be considered to ensure we have properly addressed credit:

• Is the Credit Score used acceptable for the program?

• What story does the credit report tell?

• Are all derogatory issues properly addressed?

• Do the following components all makes sense and work together?

o Timeline of Events

o Supporting Documentation

o Borrower’s Letter of Explanation

o LO Cover Sheet

• Non-Traditional or Insufficient Credit is properly documented.

Module 9 – The Four Cs of Manual Underwriting



Capacity to Repay

Areas of the loan file that need to be considered to ensure we have properly addressed

capacity to repay:

Income Stability

• Does the borrower have a 2 year history of continual employment?

• Is the income source reliable and likely to continue?

• Is there increased earnings potential?

Debt to Income Ratios

• Does the income amount make sense for their monthly obligations?

• Are the ratios equal to or less than 31% front and 43% back?

• If higher, do we have the credit score and compensating factors needed to support

exceptions?

Residual Income

• Based on region, household size and loan amount, does the borrower have enough to

support the home maintenance and payment?

Cash

Areas of the loan file that need to be considered to ensure we have properly addressed cash:

Savings and Management Ability

• Does the borrower demonstrate an ability to save consistently?

• Has the borrower shown their ability to manage their finances?

• Review bank statements for spending patterns, NSFs, overdrafts

Acceptable Funds Documentation

• Are there sufficient funds for closing and necessary reserves?

• Are the funds used for closing and reserves from acceptable sources and adequately

documented?

Note: For borrower’s with Insufficient Credit:

• Gifts are not an acceptable source

• 1 months reserves are required



Important Notes about Asset Verification:

• Borrowers are required to have 3.5% of their own funds into the transaction and cannot

include costs paid outside of closing

• All funds used for closing must be properly documented with a Verification of Deposit

and most recent bank statement OR bank statements covering 3 consecutive months

• Bank statements requirements are:

o Cannot be more than 120 days old at closing

o 180 for new construction properties

o Must include all pages

o Must show account owner names, account numbers, dates covered, and all

transactions for the period covered

• All NSFs and overdraft protection incidents must be explained

• All large deposits, balance discrepancies and new accounts must be explained and

sources documented

Important Notes about Gift Funds:

• Gift Funds not yet deposited must be noted on the 1003

• A gift letter must be provided that includes:

o Donor’s name, address, and telephone number

o Relationship between the donor and borrower

o Dollar amount and when the gift is or will be given

o Language clarifying that there is on expectation of repayment

• Documentation of the transfer of funds from the donor to borrower

• Documentation for the donor’s source of funds, to verify the funds were acceptable,

and from the donor’s own funds:

o A copy of the check drawn on the donor’s personal account or

o A certified check from account with the donor’s bank statement or

o A certified check with a letter on bank letterhead stating the donor had the

available funds or

o Other documentation validating withdrawal from donor’s account



Collateral

Things to keep in mind as you review the collateral:

• Does the property meet the minimum property standards required by FHA?

• Does the property have any health/safety hazards, or structural integrity issues that need

correction before closing?

• Has the appraiser adequately demonstrated the market value and acceptability of the

property?



Cover Sheet Memo

A Cover Sheet Memo is the loan officer’s opportunity to provide a summary of the loan file and assist the underwriter’s overall understanding of the loan file. To be effective, a Cover Sheet Memo should:

1. Be prepared by the Loan Officer

2. “Tell the Story” so the Underwriter is not left to speculate

3. Be well presented and aligned with the documentation in the file

4. It should establish:

A. Timeline and what caused the delinquencies to occur

B. How each event was resolved

C. Anticipated future behavior

Example of an effective Cover Sheet:

Module 10 – Successful Loan Submissions



Manual Underwriting Checklist

The Manual Underwriting Checklist is the same checklist the underwriters will use to initially

review a file. It is available to everyone to use upon file submission.

It is designed to:

Make key submission information readily available

Greatly improve the quality of the loan file

Help you recognize and address key factors of the file

Improve communication to underwriting

Set the file up for success during the underwriting process

The checklist can be found on the company intranet and on Carrington’s wholesale website

for brokers – remember to check for updates!



The first section offers the opportunity to provide commentary to the underwriter about

challenging areas of the loan file, including:

CREDIT: Explain Derogatory Credit, Recent Inquiries, Disputed Accounts, Fraud

Alerts/Credit Freezes, etc.

INCOME/EMPLOYMENT: Explain Employment Gaps/Transitions, Significant

increase/decrease in Income, etc.

ASSETS: Explain gift funds and sources, large deposits, retirement account loans, etc.

PROPERTY: Explain Title or Property Issues/Concerns

OTHER: Explain Borrower Motivation, Non-occupant Borrower Relationships, Existing

Residence, etc.



The second section reviews potential reasons for downgrading the file.

The third section is a helpful worksheet to assist with identifying requirements and

evaluating compensating factors for the file.



Common Missing Conditions

There are certain conditions that are missing time and again, causing loan delays and file

suspension.

Knowing and addressing these common mistakes upfront will:

• Greatly improve turn time and

• Help you to successfully move the loan to clear to close

Common Missing Letters of Explanation:

• LOE for motivation/occupancy

• LOE for derogatory credit

• LOE for decrease in income

• LOE for NSF’s on bank statements

Common Missing Documentation for Funds:

• Source of funds for large deposits

• Short enough funds to close

• Gift paper trail

• All pages of the most recent 2 months of bank statements

Other Common Missing Items:

• VOR or 12 months cancelled rent checks

• 1003 not complete or inaccurate for residency and employment history

• Missing credit report for non-borrowing spouse in a community property state

• Documentation for extenuating circumstances

Date post:	13-Oct-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Reference Guide · Manual Underwriting Certification Program Reference Guide Bringing Excellence to...

Documents