Total Mortgage Scorecard Issues a Refer Recommendation

While a “Refer” recommendation primarily triggers a manual review of the borrower’s credit, it also reinforces the underwriter’s responsibility regarding the property. The underwriter must review the appraisal report to ensure reasonable conclusions and compliance with HUD requirements. The underwriter cannot rely on any automated property valuation assessments or waivers. They must independently determine that the property provides sufficient collateral for the loan and meets all Minimum Property Requirements and Minimum Property Standards outlined in the FHA handbook. Any appraisal conditions or inspections noted must be fully satisfied before the loan can be approved.

A borrower is generally ineligible for a new FHA-insured mortgage if they had a foreclosure or a Deed-in-Lieu of Foreclosure within three years prior to case number assignment. The three-year period begins on the date the title transferred. Exceptions may be granted if the foreclosure was the result of documented extenuating circumstances beyond the borrower’s control, such as serious illness or death of a wage earner, and the borrower has since re-established good credit. Divorce or inability to sell the property due to relocation are typically not considered valid extenuating circumstances for waiving this waiting period.

Yes, if a borrower receives a “Refer” because they lack a traditional credit score, the lender must develop a credit history using non-traditional credit references. This involves obtaining a Non-Traditional Mortgage Credit Report (NTMCR) or independently verifying references. To be sufficient, the history must generally include three credit references, with at least one being a housing payment (rent) or utility bill. Other acceptable references include insurance premiums, school tuition, or payments to child care providers. This process allows the underwriter to assess the borrower’s willingness to repay debts even without a standard FICO score.

Strict waiting periods apply to manually underwritten loans. For a Chapter 7 bankruptcy, at least two years must have elapsed since the discharge date, provided the borrower has re-established good credit. A period of less than two years (but at least 12 months) may be accepted only if due to documented extenuating circumstances. For a Chapter 13 bankruptcy, the borrower must have completed at least 12 months of the payout period with satisfactory performance and receive written permission from the bankruptcy court to enter into the mortgage transaction. This differs from automated approvals which might be more lenient.

In a manual underwrite, collection accounts require specific analysis to ensure the borrower has the ability to pay. If the cumulative outstanding balance of all collection accounts is $2,000 or greater, the lender must verify that the debt is paid in full prior to settlement or verify that the borrower has a payment arrangement with the creditor. If a payment arrangement exists, that monthly payment is included in the DTI. If no arrangement exists, the lender must calculate a monthly payment equal to 5 percent of the outstanding balance and include it in the borrower’s debt ratios.

Yes, cash reserves are generally required for loans that are manually underwritten following a “Refer” recommendation. For one- and two-unit properties, the borrower must verify reserves equal to at least one month’s total mortgage payment after closing. For three- and four-unit properties, the requirement increases to three months of reserves. If the borrower relies on reserves as a compensating factor to qualify with higher debt-to-income ratios, the requirement increases significantly, often requiring verified reserves equal to three to six months of total monthly mortgage payments depending on the specific ratio tier and credit profile.

To approve a manually underwritten loan with DTI ratios exceeding the standard 31/43 limit, the underwriter must document acceptable compensating factors that show the borrower’s financial strength. Common factors include verified cash reserves equal to three or more months of mortgage payments, or a minimal increase in the new housing payment compared to the current one. Other acceptable factors include documented residual income that meets regional standards or having no discretionary debt, meaning the borrower has no open revolving balances and a history of paying off credit lines in full monthly for the past six months.

When a loan requires manual underwriting due to a “Refer” result, the FHA imposes strict DTI limits based on the borrower’s credit score. Generally, borrowers are limited to a 31 percent housing payment ratio and a 43 percent total fixed payment ratio. However, if the borrower has a Minimum Decision Credit Score of 580 or higher and documents specific compensating factors, these ratios may be exceeded. With appropriate factors, ratios can extend to 37/47 or 40/50. Borrowers with scores below 580 are strictly capped at 31/43 and cannot use compensating factors to exceed these limits.

Yes, a borrower can still be approved, but the loan must be manually underwritten. The underwriter must evaluate the file without the benefit of the automated scorecard’s risk offsets. To qualify, the borrower must meet rigorous manual underwriting standards regarding credit history, income stability, and debt-to-income ratios. For example, the underwriter must confirm the borrower has a satisfactory credit history, generally defined as no late housing or installment payments in the last 12 months. The lender must ensure the borrower demonstrates a willingness and ability to repay the debt under these more stringent manual guidelines.

A “Refer” recommendation indicates that the mortgage application does not meet the specific criteria required for an automated approval or reduced documentation requirements associated with an “Accept” classification. It is not a denial of the loan; rather, it serves as a directive that the application must be downgraded to a manual underwrite. In this situation, the lender cannot rely on the automated risk assessment. A Direct Endorsement underwriter must perform a comprehensive, independent analysis of the borrower’s creditworthiness, capacity to repay, and the property’s collateral value to determine if the loan meets FHA’s stricter manual underwriting guidelines.