There are some issues that can affect FHA home loan approval but don’t automatically mean the loan will be denied. Borrowers should be aware of the rules in the FHA single-family home loan handbook, HUD 4000.1 that tell a lender when more attention is needed for a specific loan application.
For example, did you know there are two basic types of home loan approval processes? One is a more automated process that happens when the lender uses the Automated Underwriting System (AUS) to review the loan.
AUS can be used for borrowers that don’t have certain complications with the loan; borrowers that do have certain issues with their application may find the lender is required to “downgrade” to a “manual” underwriting process that requires more scrutiny on the borrower’s financial details.
When can a borrower be downgraded to manual underwriting? Remember that manual underwriting is NOT a one-way ticket to having the loan rejected, but it does mean that the loan approval process is going to happen as quickly as it would if it were processed via AUS.
When An FHA Mortgage Must Be Downgraded And Manually Processed
HUD 4000.1 lists the following situations where a downgrade to manual processing may be required:
The mortgage application or file “contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard”; HUD 4000.1 says such information, “not considered in the AUS recommendation affects the overall insurability of the Mortgage”;
The FHA loan may be downgraded to manual processing if “the Borrower has $1,000 or more collectively” listed as Disputed Derogatory Credit Accounts;
The loan may be downgraded if the date of a borrower’s bankruptcy discharge, where applicable” is “within two years from the date of case number assignment”;
The same is true when the case number assignment date for the FHA mortgage is “within three years of the date of the transfer of title through a Pre-Foreclosure Sale” also known as a Short Sale;
The loan may also be downgraded to manual underwriting if the loan’s case number falls within three years “of the date of the transfer of title through a foreclosure sale” or a Deed-in-Lieu;
The loan may also be down graded if there is undisclosed mortgage debt or the borrower’s business income has declined more than 20%. Late or missed mortgage loan payments could also have the same result.
As you can see there are many situations where an FHA lender may not be able to use an automated system to process the mortgage loan, and the examples above are not the only scenarios where that may occur.
If you have concerns about your ability to qualify for an FHA mortgage loan based on some or all of the factors above, it’s best to contact a lender to ask what might be the best approach to the loan where timing and credit repair are concerned.
You can also call the FHA directly at their toll-free number (1-800 CALL FHA) to request a referral to a local HUD approved housing counselor near you who can help you prepare for the mortgage loan application.