FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Final Underwriting Decision (Manual) (08/19/2024)

FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Final Underwriting Decision (Manual) (08/19/2024)

d. Final Underwriting Decision (Manual) (08/19/2024) The Direct Endorsement (DE) underwriter is ultimately responsible for making an underwriting decision on behalf of their Direct Endorsement Mortgagee in compliance with HUD requirements. i. Duty of Care/Due Diligence (Manual) The underwriter must exercise the same level of care that would be used in underwriting a Mortgage entirely dependent on the Property as security. Compliance with FHA requirements is deemed to be the minimum standard of due diligence required in originating and underwriting an FHA-insured Mortgage. ii. Specific Underwriter Responsibilities (Manual) The underwriter must review each Mortgage as a separate and unique transaction, recognizing that there may be multiple factors that demonstrate a Borrower’s ability and willingness to make timely Mortgage Payments to make an underwriting decision on behalf of their Direct Endorsement Mortgagee in compliance with HUD requirements. The underwriter must evaluate the totality of the Borrower’s circumstances and the impact of layering risks on the probability that a Borrower will be able to repay the mortgage obligation according to the terms of the Mortgage. As the responsible party, the underwriter must: • review appraisal reports, compliance inspections, and credit analyses to ensure reasonable conclusions, sound reports, and compliance with HUD requirements regardless of who prepared the documentation; • determine the acceptability of the appraisal, the inspections, the Borrower’s capacity to repay the Mortgage, and the overall acceptability of the Mortgage for FHA insurance; • identify any inconsistencies in information obtained by the Mortgagee in the course of reviewing the Borrower’s application regardless of the materiality of such information to the origination and underwriting of a Mortgage; and • resolve all inconsistencies identified before approving the Borrower’s application, and document the inconsistencies and their resolutions of the inconsistencies in the file. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 361 Last Revised: 11/26/2025 The underwriter must identify and report any misrepresentations, violations of HUD requirements, and fraud to the appropriate party within their organization. iii. Underwriting of Credit and Debt (Manual) The underwriter must determine the creditworthiness of the Borrower, which includes analyzing the Borrower’s overall pattern of credit behavior and the credit report. See Credit Requirements (Manual). The lack of traditional credit history or the Borrower’s decision to not use credit may not be used as the sole basis for denying the mortgage application. Compensating factors cannot be used to compensate for any derogatory credit. The underwriter must ensure that there are no other unpaid obligations incurred in connection with the mortgage transaction or the purchase of the Property. iv. Underwriting of Income (Manual) The underwriter must review the income of a Borrower and verify that it has been supported with the proper documentation. See Income Requirements (Manual). v. Underwriting of Assets (Manual) The underwriter must review the assets of a Borrower and verify that they have been supported with the proper documentation. See Asset Requirements (Manual). vi. Verifying Mortgage Insurance Premium and Mortgage Amount (Manual) The underwriter must review the MIP and mortgage amount and verify that they have been supported with the proper documentation. See underwriting. vii. Calculating Qualifying Ratios (Manual) (A) General Information about Qualifying Ratios For all transactions, except non-credit qualifying Streamline Refinances, the underwriter must calculate the Borrower’s Total Mortgage Payment to Effective Income Ratio (PTI) and the Total Fixed Payment to Effective Income ratio, or DTI, and verify compliance with the ratio requirements listed in the Approvable Ratio Requirements (Manual) chart. The Mortgagee must exclude any obligation that is wholly secured by existing assets of the Borrower from the calculation of the Borrower’s debts, provided the assets securing the debt are also not considered in qualifying the Borrower. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 362 Last Revised: 11/26/2025 (B) Calculating Total Mortgage Payment The total Mortgage Payment includes: • P&I; • real estate taxes; • Hazard Insurance; • Flood Insurance as applicable; • MIP; • HOA or condominium association fees or expenses; • Ground Rent; • special assessments; • payments for any acceptable secondary financing; and • any other escrow payments. The Mortgagee may deduct the amount of the Section 8 Housing Choice Voucher if it is paid directly to the Servicer. (1) Estimating Real Estate Taxes The Mortgagee must use accurate estimates of monthly tax escrows when calculating the total Mortgage Payment. In New Construction cases and Manufactured Homes converting to real estate, property tax estimates must be based on the land and improvements. Where real estate taxes are abated, Mortgagees may use the abated amount provided that (1) the Mortgagee can document the abated amount with the taxing authority and (2) the abatement will remain in place for at least the first three years of the Mortgage. (2) Condominium Utility Expenses The portion of a condominium fee that is clearly attributable to utilities may be subtracted from the HOA fees before computing qualifying ratios, provided the Borrower provides proper documentation, such as statements from the utility company. (3) Temporary Interest Rate Buydowns The Mortgagee must use the Note rate when calculating principal and interest for Mortgages that involve a temporary interest rate buydown. (C) Calculating Total Fixed Payment The total fixed payment includes: II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 363 Last Revised: 11/26/2025 • the total Mortgage Payment; and • monthly obligations on all debts and liabilities. viii. Approvable Ratio Requirements (Manual) The maximum Total Mortgage Payment to Effective Income Ratio (PTI) and Total Fixed Payments to Effective Income Ratio, or DTI, applicable to manually underwritten Mortgages are summarized in the matrix below. The qualifying ratios for Borrowers with no credit score are computed using income only from Borrowers occupying the Property and obligated on the Mortgage. Non-occupant co-Borrower income may not be included. Lowest Minimum Decision Credit Score Maximum Qualifying Ratios (%) Acceptable Compensating Factors 500-579 or No Credit Score 31/43 Not applicable. Borrowers with Minimum Decision Credit Scores below 580, or with no credit score may not exceed 31/43 ratios. Energy Efficient Homes may have stretch ratios of 33/45. 580 and above 31/43 No compensating factors required. Energy Efficient Homes may have stretch ratios of 33/45. 580 and above 37/47 One of the following: • verified and documented cash Reserves; • minimal increase in housing payment; or • residual income. 580 and above 40/40 No discretionary debt. 580 and above 40/50 Two of the following: • verified and documented cash Reserves; • minimal increase in housing payment; • significant additional income not reflected in Effective Income; and/or • residual income. ix. Documenting Acceptable Compensating Factors (Manual) The following describes the compensating factors and required documentation that may be used to justify approval of manually underwritten Mortgages with qualifying ratios as described above. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 364 Last Revised: 11/26/2025 (A) Energy Efficient Homes (1) Standard For Mortgages on New Construction, the Borrower is eligible for the EEH stretch ratios when the Property meets or exceeds the higher of: • the latest energy code standard that has been adopted by HUD through a Federal Register notice; • the applicable International Energy Conservation Code (IECC) year used by the state or local building code; or • a Manufactured Home that is certified as ENERGY STAR to their Quality Assurance Provider and ensure that an ENERGY STAR label is affixed, commonly found near the HUD Data Plate or inside the electric panel cover of the home. For Mortgages on Existing Construction, the Borrower is eligible for the EEH stretch ratios when the property meets either of the following conditions: • homes that currently score a “6” or higher on the Home Energy Score scale; • homes where documented cost-effective energy improvements, as identified in the Home Energy Score Report, would increase a home’s score to a “6” or higher are completed prior to closing, or in association with FHA’s 203(k), Weatherization, EEM or Solar and Wind programs; or • a Manufactured Home that is certified as ENERGY STAR to their Quality Assurance Provider and ensure that an ENERGY STAR label is affixed, commonly found near the HUD Data Plate or inside the electric panel cover of the home. (2) Required Documentation The following documents must be included in the case binder submitted for endorsement: • For Mortgages on Existing Construction, a copy of the Home Energy Score Report, or a photo of the ENERGY STAR label on a Manufactured Home. • For Mortgages on New Construction, a copy of form HUD-92541, Builder's Certification of Plans, Specifications, and Site, to evidence the IECC code, successor code, or local/state building code used; or the manufacturer’s invoice of the Manufactured Home indicating that the unit is ENERGY STAR qualified. (B) Verified and Documented Cash Reserves Verified and documented cash Reserves may be cited as a compensating factor subject to the following requirements. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 365 Last Revised: 11/26/2025 • Reserves are equal to or exceed three total monthly Mortgage Payments (one and two units); or • Reserves are equal to or exceed six total monthly Mortgage Payments (three and four units). Reserves are calculated as the Borrower’s total assets as described in Asset Requirements (Manual) less: • the total funds required to close the Mortgage; • Gifts; • borrowed funds; and • cash received at closing in a cash-out refinance transaction or incidental cash received at closing in the mortgage transaction. (C) Minimal Increase in Housing Payment A minimal increase in housing payment may be cited as a compensating factor subject to the following requirements: • the new total monthly Mortgage Payment does not exceed the current total monthly housing payment by more than $100 or 5 percent, whichever is less; and • there is a documented 12 month housing payment history with no more than one 30 Day late payment. In cash-out transactions all payments on the Mortgage being refinanced must have been made within the month due for the previous 12 months. • If the Borrower has no current housing payment Mortgagees may not cite this compensating factor. The Current Total Monthly Housing Payment refers to the Borrower’s current total Mortgage Payment or current total monthly rent obligation. (D) No Discretionary Debt No discretionary debt may be cited as a compensating factor subject to the following requirements: • the Borrower’s housing payment is the only open account with an outstanding balance that is not paid off monthly; • the credit report shows established credit lines in the Borrower’s name open for at least six months; and • the Borrower can document that these accounts have been paid off in full monthly for at least the past six months. Borrowers who have no established credit other than their housing payment, no other credit lines in their own name open for at least six months, or who cannot document that all other accounts are paid off in full monthly for at least the past six months, do not qualify under this criterion. Credit lines not in the Borrower’s name but for which they are an authorized user do not qualify under this criterion. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 366 Last Revised: 11/26/2025 (E) Significant Additional Income Not Reflected in Effective Income Additional income from Overtime, Bonuses, Part-Time or Seasonal Employment that is not reflected in Effective Income can be cited as a compensating factor subject to the following requirements: • the Mortgagee must verify and document that the Borrower has received this income for at least one year, and it will likely continue; and • the income, if it were included in gross Effective Income, is sufficient to reduce the qualifying ratios to not more than 37/47. Income from non-borrowing spouses or other parties not obligated for the Mortgage may not be counted under this criterion. This compensating factor may be cited only in conjunction with another compensating factor when qualifying ratios exceed 37/47 but are not more than 40/50. (F) Residual Income Residual income may be cited as a compensating factor provided it can be documented and it is at least equal to the applicable amounts for household size and geographic region found on the Table of Residual Incomes By Region found in the Department of Veterans Affairs (VA) Lenders Handbook - VA Pamphlet 26-7, Chapter 4.9 b and e. (1) Calculating Residual Income Residual income is calculated as total Effective Income of all occupying Borrowers less: • state income taxes; • federal income taxes; • municipal or other income taxes; • retirement or Social Security; • total fixed payment; • estimated maintenance and utilities; • job related expenses (e.g., child care); and • the amount of the Gross Up of any Nontaxable Income. If available, Mortgagees must use Tax Returns and where applicable, state tax returns, from the most recent tax year to document state and local taxes, retirement, Social Security, and Medicare. If tax returns are not available, Mortgagees may rely upon current pay stubs. For estimated maintenance and utilities, Mortgagees must multiply the Gross Living Area of the Property by the maintenance and utility factor found in the Lenders Handbook - VA Pamphlet 26-7. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 367 Last Revised: 11/26/2025 (2) Using Residual Income as a Compensating Factor To use residual income as a compensating factor, the Mortgagee must count all members of the household of the occupying Borrower without regard to the nature of their relationship and without regard to whether they are joining on title or the Note to determine “family size.” Exception The Mortgagee may omit any individuals from “family size” who are fully supported from a source of verified income which is not included in Effective Income in the mortgage analysis. These individuals must voluntarily provide sufficient documentation to verify their income to qualify for this exception. From the table provided in Lenders Handbook - VA Pamphlet 26-7, select the applicable mortgage amount, region and household size. If residual income equals or exceeds the corresponding amount on the table, it may be cited as a compensating factor. x. Borrower Approval or Denial (Manual) (A) Re-underwriting The Mortgagee must re-underwrite a Mortgage when any data element of the Mortgage changes and/or new Borrower information becomes available. (B) Documentation of Final Underwriting Review Decision The underwriter must complete the following documents to evidence their final underwriting decision. For cases involving Mortgages to HUD employees, the Mortgagee completes the following and then submits the complete underwritten mortgage application to FHA for review and issuance of a Firm Commitment or Rejection Notice prior to closing. For cases involving Mortgagees that receive a Direct Endorsement Program Test Case Phase approval letter from FHA, the Mortgagee completes the following and then submits the complete underwritten mortgage application post-closing to FHA for review and issuance of a Firm Commitment or Rejection Notice. (1) Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary The underwriter must record the following items on form HUD-92900-LT: • their decision; • any compensating factors; II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 368 Last Revised: 11/26/2025 • any modification of the mortgage amount and approval conditions under “Underwriter Comments”; and • their Direct Endorsement Identification Number and signature. (2) Form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value The underwriter must confirm that form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value, is completed as directed in the form instructions. (3) Form HUD-92900-A, HUD Addendum to Uniform Residential Loan Application The underwriter must complete form HUD-92900-A, HUD Addendum to Uniform Residential Loan Application, as directed in the form instructions. An authorized officer of the Mortgagee, the Borrower, and the underwriter must execute form HUD-92900-A, as indicated in the instructions. (C) Conditional Approval The underwriter must condition the approval of the Borrower on the completion of the final URLA (Fannie Mae Form 1003/Freddie Mac Form 65) and form HUD- 92900-A at or before closing if the underwriter relied on an initial URLA and form HUD-92900-A in underwriting the Mortgage. (D) HUD Employee Mortgages If the Mortgage involves a HUD employee, the Mortgagee must condition the loan on the approval of the Mortgage by HUD. The Mortgagee must submit the case binder to FHA for final underwriting approval. (E) Notification of Borrower of Approval and Term of the Approval The Mortgagee must timely notify the Borrower of their approval. The underwriter’s approval or the Firm Commitment is valid for the greater of 90 Days or the remaining life of the: • Conditional Commitment issued by HUD; or • the underwriter’s approval date of the Property, indicated as Action Date on form HUD-92800.5B. (F) Responsibilities upon Denial When a Mortgage is denied, the Mortgagee must comply with all requirements of the FCRA, and the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B (12 CFR Part 1002). II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 369 Last Revised: 11/26/2025 xi. RESERVED FOR FUTURE USE RESERVED FOR FUTURE USE Previous content from this section is deleted and this section is reserved for future use. xii. Underwriting Nonprofit Borrowers (Manual) (A) General Eligibility Nonprofit agencies must be HUD-approved as a Borrower prior to case number assignment. FHA approves or denies the nonprofit agency’s participation in FHA activities. The approval is valid for a two-year period. (B) Borrower Eligibility The Mortgagee must review the Nonprofit List in FHAC, and ensure the maximum case load limitation is not exceeded for nonprofit Borrowers. The Mortgagee must ensure that Additional Eligibility Requirements for Nonprofit Organizations and State and Local Government Agencies are met. The Mortgagee must verify that the nonprofit organization remains eligible under Section 501(c)(3) as exempt from taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended. (1) Employer Identification Number The Mortgagee must obtain the Employer Identification Number (EIN) of the nonprofit Borrower and enter it into the SSN field in FHAC. (2) Credit Alert and Limited Denial of Participation Screening The Mortgagee must screen nonprofit Borrowers through the Credit Alert Verification Reporting System (CAIVRS) and the Limited Denial of Participation List using the nonprofit Borrower’s EIN. (C) Program and Product Limitations Nonprofit Borrowers are eligible only for fixed rate Mortgages. Nonprofit Borrowers are eligible only for FHA-to-FHA refinances. Nonprofit Borrowers are not eligible for cash-out refinances. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 370 Last Revised: 11/26/2025 (D) Maximum Loan-to-Value Limits Mortgages for nonprofit Borrowers are subject to the same LTV limitations as Mortgages secured by a Principal Residence. (E) Underwriting The Mortgagee must underwrite nonprofit Borrowers in accordance with the guidance provided in this section. The Underwriting the Borrower Using the TOTAL Mortgage Scorecard and Manual Underwriting of the Borrower sections are not applicable to nonprofit Borrowers. The Mortgagee must obtain documentation to determine the nonprofit Borrower’s actual financial capacity and demonstrate that it has stability and proper cash management. (1) Standard (a) Funding Stream Analysis The Mortgagee must consider the reliability and duration of the funding stream, and whether the primary sources of funding are competitive, whether the nonprofit Borrower’s funding stream is from a mix of private and public sources, or only from public funds, and if other sources of funding are available should one or more be curtailed. The Mortgagee must also consider whether those funding sources permit overhead and administrative allowances as well as the amount of the nonprofit Borrower’s assets that will be encumbered by the downpayments on the Mortgages. (b) Financial Capacity Analysis The Mortgagee must analyze the year-to-date and previous two years’ financial statements, balance sheets, statements of activity and statements of cash flow to determine the financial stability and capacity of the nonprofit Borrower, including all mortgage applications in process. (i) Unrestricted Cash Balance The Mortgagee must determine if the nonprofit Borrower has an unrestricted cash balance exclusive of lines of credit and Rental Income from the financed Properties that is stable or increasing and supports a six month reserve meeting the greater of: • 10 percent of the total Mortgage Payments due each month on all Mortgages; or • total Mortgage Payments for the single largest Mortgage. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 371 Last Revised: 11/26/2025 (ii) Liquidity Ratio The Mortgagee must determine if the nonprofit Borrower has a liquidity ratio (current assets divided by current liabilities) of 2.00 or greater. Lines of credit are not to be considered in this ratio. (iii) Total Net Assets (Equity) The Mortgagee must determine that the total net assets are: • stable or increasing; and • equal to or greater than 25 percent of the proposed mortgage debt. (iv) Unrestricted Net Assets The Mortgagee must determine that the unrestricted net assets are stable or increasing. (v) Total Assets and Liabilities The Mortgagee must determine that: • the total assets are stable or increasing; and • the trend of liabilities is stable or increasing at the same rate as the total assets. (vi) Support and Revenue Accounts Definition Support and Revenue Accounts refer to operating income and other non- debt income sources. Standard The Mortgagee must determine that: • the support and revenue accounts are stable or increasing; and • the trend of operating expenses is stable or increasing at the same rate as the support and revenue accounts. (vii) Cash Flow The Mortgagee must determine that the trend of cash flow from operating activities is positive. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 5. Manual Underwriting of the Borrower Handbook 4000.1 372 Last Revised: 11/26/2025 (viii) Working Capital Definition Working Capital refers to the liquid assets less short-term liabilities. Standard The Mortgagee must determine that the trend of working capital is stable or increasing. (2) Required Documentation The Mortgagee must obtain: • the two most recent years’: o audited financial statements (balance sheet, statement of activity, statement of cash flow); and o IRS Form 990, Return of Organization Exempt from Income Tax; • most recent audited 90-Day year-to-date financial statement; • credit reports on the nonprofit agency; and • corporate resolution delegating signatory authority. (F) Final Underwriting Decision for Nonprofit Borrowers The Mortgagee must analyze the nonprofit Borrower’s financial capacity for each Mortgage being considered in accordance with the standards above. If the nonprofit Borrower does not meet all of the standards above, the Mortgagee must document acceptable compensating factors. The Mortgagee must describe how it arrived at the conclusion that the nonprofit Borrower was an acceptable mortgage risk and met FHA’s eligibility criteria. The analysis must consider the effect of the proposed mortgage debt(s) on the nonprofit agency's financial condition. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 6. Closing Handbook 4000.1 373 Last Revised: 11/26/2025 6. Closing

Source: FHA Single Family Housing Policy Handbook 4000.1, Part II — d. Final Underwriting Decision (Manual) (08/19/2024) · source URL · snapshot 8c03836f77f317e1