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Most FHA loans are approved through the TOTAL Scorecard, an automated underwriting engine that returns either an Accept or a Refer. When a loan is Referred — or falls into a category HUD requires to be manually underwritten regardless of the Scorecard result — a human underwriter applies a more detailed set of debt-to-income limits and compensating-factor rules from HUD Handbook 4000.1.
Why a loan gets Referred
TOTAL Scorecard commonly Refers a loan for reasons including:
- Credit score below the automated engine's Accept threshold
- High debt-to-income ratio relative to credit profile
- Limited or "thin" credit history
- Certain recent derogatory credit events
- No usable credit score, which is manually underwritten by default
- Certain loan characteristics HUD specifically requires to be manually underwritten (for example, borrowers with one or more disputed accounts above the applicable threshold, discussed in our collections and charge-offs guide)
A Refer is not a denial. It means the file moves to manual underwriting, where a broader set of factors — not just a ratio and a score — determines approval.
The manual underwriting DTI tiers
Without any compensating factors, HUD's base guideline limits manually underwritten loans to roughly:
| Compensating factors | Front-end (housing) DTI | Back-end (total) DTI |
|---|---|---|
| None | ~31% | ~43% |
| One strong compensating factor | ~37% | ~47% |
| Two strong compensating factors | ~40% | ~50% |
These figures are the widely-used shorthand for HUD's manual underwriting matrix in Handbook 4000.1. The exact ratios a lender applies can vary slightly by overlay, and the underwriter documents in writing which specific compensating factor(s) justify exceeding the base 31/43 ratios.
HUD's published compensating factors
Handbook 4000.1 lists specific compensating factors an underwriter may cite, including:
- Verified cash reserves meeting HUD's minimum for the property type
- Minimal increase in the borrower's new housing payment compared to prior housing expense
- Significant additional income not reflected in effective income used for qualifying (for example, seasonal or overtime income that doesn't meet standard documentation but is verified)
- Substantial non-taxable income, grossed up appropriately
- Residual income that meets or exceeds guidelines after all obligations
- A documented history of successfully carrying a similar or higher housing payment for a sustained period
An underwriter must document the specific factor and how the file meets it — a general sense that a borrower "looks fine" is not sufficient support for exceeding the base ratios.
Reserves as a compensating factor
Reserves must be the borrower's own verified liquid funds remaining after closing costs and down payment — gift funds used to fund the transaction itself don't count as post-closing reserves. See our FHA gift funds guide for how gifted money is documented separately from reserve requirements. Typical reserve compensating-factor documentation shows one to three months of PITI (principal, interest, taxes, and insurance) held in a bank, retirement, or investment account, seasoned per FHA's asset-verification rules.
Checklist: preparing a manually underwritten file
- [ ] Confirm with your loan officer why the file Referred or requires manual underwriting
- [ ] Identify which compensating factor(s) you can document — reserves, low payment shock, or verified additional income are the most common
- [ ] Gather two months of bank/retirement statements to prove reserves are seasoned and yours
- [ ] Pull rental or mortgage payment history showing on-time payments at a similar or higher amount
- [ ] Resolve or document any collections, judgments, or disputes per HUD's thresholds
- [ ] Ask whether your target DTI requires one or two compensating factors, and confirm both are documented in writing before submission
Worked example (illustration only)
A borrower has a total monthly debt-to-income ratio of 46% and a front-end ratio of 33%. Base guidelines (31/43) would not support this file on their own.
The borrower can document:
- Six months of rental payment history at an amount roughly equal to the new PITI (minimal payment shock), and
- Two months of verified reserves in a savings account, separate from closing funds.
With two documented compensating factors, the file falls within the roughly 40%/50% tier, meaning both the 33% front-end and 46% back-end ratios are supportable under HUD's manual underwriting guidelines — subject to the underwriter's full review of the credit profile.
Manual underwriting isn't a workaround
It's worth being direct: manual underwriting is not a way to stretch into a payment you can't sustain. HUD built the compensating-factors framework to identify borrowers whose full financial picture is stronger than a single ratio suggests — verified savings, a track record of a similar payment, or income the automated system can't fully capture. Run your own numbers with our affordability calculator before assuming a higher ratio will work for your budget, and review our FHA requirements overview for how credit score minimums interact with manual underwriting eligibility.