Excessive Ratios On FHA’s

In a recent article highlighting the changes in the FHA Total Scorecard Guide (TSG), it was noted that FHA added a bullet point on page 13 under the review rules for Total. The term ‘excessive ratios’ is now a bullet point and requires a DE underwriter to manually underwrite the file when this rule is triggered. Our team did a little digging and found Mortgagee Letter 08-22 that actually put this on the list of system overrides in September of 2008 but it was buried in a paragraph. We thought it was important to address this topic in another article to make sure the details are clear. All through the TSG are references that a loan meets FHA credit and capacity requirements with an Approve/Accept rating. So do lenders really need to manually underwrite the DTI even with an AUS approval? Back in 2008 when the ML was published there were a few bloggers concerned that FHA could pull the rug out from an Approve/Eligible loan due to a high DTI. Even today, lenders watch the DTI to be sure the compensating factors make sense with the amount of monthly debt the borrower will carry, even with the Total approval. This is prudent underwriting but can cause heartache to an LO who has already told the borrower the closing is set for Friday! Let’s answer the question by looking first at what is clearly stated in the guide: A loan is eligible for FHA insurance endorsement if:
  • The TOTAL Mortgage Scorecard rated the mortgage loan application as an ‘accept” or “approve;” or “refer” was issued and the DE Underwriter manually underwrote and approved the mortgage application; and
  • The data entered into the AUS is true, complete and accurate; and
  • The entire loan package meets all other FHA requirements except for those specifically not required because the loan application was evaluated by TOTAL and an “accept” or “approve” was issued.
FHA will honor the Total approval and the approved DTI, as long as they see the data and the documentation the same way the underwriter did. However, not all underwriters and auditors see eye to eye. In an audit, FHA may determine a different amount for monthly income or a monthly debt, re-score the loan using TOTAL’s emulator in a post closing environment and potentially receive a ‘refer’. Even a small change in the income can move the decision, as you all know. If FHA’s review results in a ‘refer’, the waivers for credit and capacity just flew out the window and the lender will be asked to defend the DTI based on manual underwriting criteria. This is tough to do in cases where Total has approved a DTI of 50%. Rest assured if the documentation clearly supports the borrower works 40 hours per week and earns $35 per hour with full time earnings for two straight years, FHA will use $6,066 per month just like the underwriter will. As with all FHA rules, the catch is when you get to the word ‘however’.