There is specific criteria that HUD, VA, Fannie Mae, Freddie Mac, as well as other agencies and investors have for determining if a borrower is qualified for the loan. The criteria applies when evaluating any loan for creditworthiness, and LENDER applies it to all products.  When making the decision to lend, the lender must consider what is referred to as the 4Cs of underwriting. Those are:

  • CHARACTER (Credit)
  • CAPACITY (Income)
  • CAPITAL (Assets)
  • COLLATERAL (Value)



LENDER must review the borrower’s overall history of credit to make a sound judgment regarding their attitude toward credit use. To help with that determination, the following guidelines have been established.

Except for products that allow no credit score, all borrowers must have a valid credit score.  The credit score cannot be determined using insufficient trade lines (authorized user accounts, deferred student loans, co-signed accounts, derogatory or disputed credit lines.)  For products that allow borrowers with no credit score, alternative documentation (non-traditional credit) to support the borrowers use of credit, as described in the product profiles, is required.

In general, there are no minimum traditional (credit reported directly to the credit bureaus) trade line requirements with an AUS Approve/Eligible.   You must always meet the requirements as listed on the AUS approval.  However, always refer to specific program guidelines for any additional requirements.

CAPACITY (Income/Debts)

Do the borrowers have a documented work history with stability and sufficient income to meet monthly obligations? Qualifying income should be stable, predictable, and likely to continue. The underwriter must determine that the borrower demonstrates the financial wherewithal to repay the mortgage loan as well as other obligations. In determining stable income, underwriters must be able to conclude that the income is likely to continue for the next three years.


When evaluating the borrower’s capacity, consider the following factors:

• Payment shock

• Reserves

• Income stability

• Debt ratios

• History of savings


All liabilities affecting income or assets that will affect the borrower’s ability to fulfill the mortgage payment obligation must be included in the capacity analysis, including housing payment (mortgage or rent) for each borrower’s principal residence, all revolving charge accounts, installment loan debts (depending on product, loans with a remaining payment term greater than 10 months may be excluded), lease payments,  real estate loans, HELOCs, alimony and child support, maintenance payments, and all other debts of a recurring nature.

For each liability, the underwriter must determine the unpaid balance, the terms of repayment, and the borrower’s payment history, and verify any other liability that is not shown on a credit report by obtaining documentation from the

borrower or creditor.  If the credit report does not contain a reference for each significant open debt shown on the loan application—including outstanding mortgage debt, bank, student, or credit union loans—a separate credit verification must be provided. If a current liability appears on the credit report that is not shown on the loan application, the borrower should provide a reasonable explanation for the undisclosed debt and documentation may be required to support the borrower’s explanation. 

If the borrower discloses, or it is discovered that additional liabilities exist after the underwriting decision has been made, up to and concurrent with closing, the loan must be recalculated, and the borrower's debt-to-income ratio must be updated.  A Lookback Report is required to confirm no new debt was obtained after the credit report and prior to loan closing. Information about LENDER’s Lookback Report policy can be obtained upon request .


CAPITAL (Assets)

Do the borrowers have sufficient assets to cover the costs of the loan?  Documentation must be reviewed to ensure large deposits are handled in compliance with the agencies, NSF are considered when reviewing the overall loan risk, deposits on bank statements support income, social security, pension, etc. used in the loan file. Review statements for any undisclosed debts that are being paid, large withdrawals, etc.  Additionally, when reviewing assets, the underwriter must confirm the borrower has sufficient “capital” capacity to meet the closing cost obligations.  The underwriter must check the borrower’s current balances and recent statements for any bank accounts, including checking and savings, confirming that the required funds and reserves are available.



Does the property meet the agency minimum standards and is the value determination supported?  The appraisal must be reviewed to ensure any agency requirements are met.  Underwriters need to determine the value and type of property being financed. It is important for the Underwriter to confirm that the loan amount does not exceed a property’s value. If the borrower owes more than the property is worth, the lender may not be able to recover a loan’s unpaid balance, in the case of a default (or the borrower does not make their payments as agreed). Additionally, automated tools such as the appraisal’s Submission Summary Report (SSR) and Fannie Mae’s Collateral Underwriter (CU) should be reviewed for conventional and FHA, if needed.  Desk or field review should be ordered when there is concern in the value or when required due to red flags or program requirements.  VA requires use of the LoanSafe Appraisal Manager (LSAM) report for each appraisal and the underwriter must review and ensure the value is supported.



Please note that TOTAL Scorecard/DU/LP/GUS are tools to support prudent underwriting decisions. An automated approval does not mean that additional documentation may not be required to justify and support the underwriting decision. There are many aspects of a loan file that the automated engine cannot see and properly analyze.

As stated above, LENDER is responsible for determining the borrowers meet the 4Cs. Some examples (but not limited to) items that would be a cause for concern are:

  • Additional debt not disclosed on the credit report;
  • NSF charges on bank statements showing the borrower has difficulty managing their finances;
  • Multiple job changes with different career fields, declining income, gaps in employment;
  • Minimal or no housing expenses and total obligations with no demonstrated savings ability;

Each loan must be looked at individually on its own merit. We are expected to look at the risk factors and recognize that multiple layers of risk within a file may be cause to decline the loan request.



LENDER does not allow manual underwrites on all products, please refer to the product profiles for specific requirements.

When performing a manual underwrite, the underwriter must ensure that all agency and product profile guidelines are met and that the loan is a good credit risk. Often, manual underwrites will require additional documentation that is not required when using an AUS approval, so it is imperative to review agency guidelines and product profiles for all requirements.  The same factors that are analyzed with an AUS approval must also be analyzed with a manual underwrite.  Refer to LENDER’s product profiles to determine credit scores, credit profiles and maximum ratios that LENDER will allow and when manual underwriting is allowed.

Additionally, for FHA loans, the requirements as outlined 4000.1 FHA Single Family Housing Policy Handbook must be met.  These include additional reserve and ratios requirements.  Reserve requirements are based on the number of units and ratio requirements are based on borrower credit scores.  Ratios are only allowed to be exceeded as outlined by HUD with acceptable compensating factors.  The allowable compensating factors vary depending on the credit score and credit profile of the borrower.



All manually underwritten loans must meet or exceed the following minimum reserve requirements:

  • 1 and 2 Unit Properties. Reserves must equal or exceed one total monthly mortgage payment.
  • 3 and 4 Unit Properties. Reserves must equal or exceed three total monthly mortgage payments.


Reserves are defined as:

  • the sum of verified and documented borrower funds; minus
  • the sum the borrower is required to pay at closing, including the cash investment, closing costs, prepaid expenses, any payoffs that are a condition of loan approval, and any other expense required to close the loan; but not including
  • the amount of cash taken at settlement in cash-out transactions or incidental cash received at settlement in other loan transactions, gift funds in excess of the amount required for the cash investment and other expenses, equity in another property, and borrowed funds from any source.


Reserves do not include: 

  • the amount of cash taken at settlement in cash-out transactions;
  • incidental cash received at settlement in other loan transactions;
  • gift funds;
  • equity in another Property; or
  • borrowed funds from any source



For FHA, the following Maximum Qualifying Ratio Matrix is the matrix published by HUD. However, LENDER have overlays to ratio requirements, and must refer to the product profiles for specific requirements.  Additionally, the underwriter should refer directly to the 4000.1 Handbook published by HUD to ensure all of HUD’s requirements are met.  

Manual Underwriting Matrix

Lowest Minimum Decision Credit Score

Maximum Qualifying Ratios (%)

Acceptable Compensating factors

500-579 or No Score


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


No compensating factors required.


Energy Efficient Homes may have stretch ratios of 33/45.

580 and above


One of the following:

  • verified and documented cash Reserves;
  • minimal increase in housing payment; or
  • residual income


580 and above


No discretionary debt (LENDER does not allow this option)


580 and above


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.




























Refer to the specific agency when looking at acceptable compensating factors.

Compensating factors as published by HUD for FHA loans:

Compensating Factors

Documentation Required to Support the Compensating Factors

Verified and Documented


Cash Reserves

Verified and documented cash Reserves may be cited as a compensating factor subject to the following requirements.


  • 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 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.

Minimal Increase in Housing Payment


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.

No Discretionary Debt

LENDER does not allow this option

Significant Additional

Income Not Reflected in Gross 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.

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 VA Pamphlet 26-7.  See HUD Handbook 4000.1 for information on calculating Residual Income as allowed by HUD, however if using residual income as one of the compensating factors, in addition to the deductions listed in the 4000.1, underwriter must also include “all other debts on the credit report.”

Compensating factors as published by VA for VA loans:

Compensating factors may affect the loan decision. These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio. They cannot be used to compensate for unsatisfactory credit.

Valid compensating factors should represent unusual strengths rather than mere satisfaction of basic program requirements. For example, the fact that an applicant has sufficient assets for closing purposes, or meets the residual income guideline, is not a compensating factor.

Valid compensating factors should logically be able to compensate (to some extent) for the identified weakness in the loan. For example, significant liquid assets may compensate for a residual income shortfall whereas long-term employment would not.

Compensating factors include, but are not limited to the following:

  • excellent credit history,
  • conservative use of consumer credit,
  • minimal consumer debt,
  • long-term employment,
  • significant liquid assets,
  • sizable down payment,
  • the existence of equity in refinancing loans,
  • little or no increase in shelter expense,
  • military benefits,
  • satisfactory homeownership experience,
  • high residual income,
  • low debt-to-income ratio,
  • tax credits for child care, and
  • tax benefits of home ownership.



As part of the underwriting process, underwriters utilize various tools and data sources, including but not limited to:

  • Fraud Tool (i.e., DataVerify)
  • Income Calculators (LoanBeam)
  • Property Profiles report (i.e., Real EC SiteXPro)
  • Credit Lookback Reports
  • Appraisal Analysis Tools (i.e., Collateral Underwriter/Collateral Advisor)
  • Proprietary income/asset analysis worksheets