FHA Manual Underwrite Residual Income Requirements

FHA manual underwrites follow HUD Handbook 4000.1 guidelines, which do not mandate residual income analysis. But underwriters and DE lenders frequently use residual income as a compensating factor on high-DTI manual underwrites.

FHA Manual Underwrite DTI Caps

Under HUD 4000.1, a manually underwritten FHA loan has a maximum 31% front-end DTI and 43% back-end DTI as a baseline. With documented compensating factors, back-end DTI may be stretched to 50%. Compensating factors include: verified and documented reserves of at least three months PITI, minimal increase in housing payment (less than $100 or 5% of prior payment), and residual income meeting the VA threshold tables for the geographic region and household size.

How VA Residual Income Tables Apply

• ✦VA residual income measures net income remaining after all monthly obligations including the proposed PITI
• ✦Northeast region, family of four: residual income threshold is $1,117 per month
• ✦Midwest region, family of four: threshold is $1,003 per month
• ✦South region, family of four: threshold is $1,003 per month
• ✦West region, family of four: threshold is $1,117 per month
• ✦FHA underwriters who adopt these thresholds must document it explicitly as a compensating factor in the credit narrative

Presenting Residual Income in the Credit Memo

When using residual income as a compensating factor on an FHA manual underwrite, calculate it the same way VA does: gross income minus federal tax, FICA, state tax, and all monthly debt obligations including the proposed housing payment. Present the resulting figure against the applicable VA table threshold. A borrower who exceeds the threshold by 20% or more has a strong compensating factor that most DE underwriters will credit.