If you've been told your FHA loan application received a "Refer" status from the Automated Underwriting System (AUS), don't panic. This doesn't mean you're denied — it means your file needs human review through manual underwriting. And with the right compensating factors, you may still qualify for an FHA loan with as little as 3.5% down.
Key Takeaways for 2026
- FHA manual underwriting allows DTI up to 50% with two compensating factors
- Minimum credit score of 500 (580+ for 3.5% down payment)
- Non-traditional credit accepted for borrowers without FICO scores
- Bankruptcy waiting period as short as 12 months for Chapter 13
What is FHA Manual Underwriting?
FHA manual underwriting is when a human underwriter reviews your loan application instead of relying solely on the Automated Underwriting System (AUS). When the computer can't approve your loan automatically, it returns a "Refer" status, signaling that a human needs to evaluate your complete financial picture.
Common reasons for manual underwriting include:
- Thin credit file: Limited or no traditional credit history
- High DTI ratios: Debt exceeds standard automated limits
- Recent credit events: Bankruptcy, foreclosure, or short sale
- Non-traditional credit: No FICO score available
- Complex income: Self-employment or variable income sources
The good news? Manual underwriting isn't a denial — it's an opportunity for someone to look at the nuances of your situation that a computer algorithm might miss.
2026 FHA Manual Underwriting DTI Limits
Debt-to-income (DTI) ratio is one of the most important factors in FHA manual underwriting. FHA uses a tiered system where your allowable DTI increases based on the number of compensating factors you have.
| Compensating Factors | Front-End DTI | Back-End DTI |
|---|---|---|
| No Compensating Factors | 31% | 43% |
| One Compensating Factor | 37% | 47% |
| Two+ Compensating Factors | 40% | 50% |
How DTI is calculated:
- Front-End DTI = Housing Payment ÷ Gross Monthly Income
- Back-End DTI = (Housing + All Debts) ÷ Gross Monthly Income
For example, if you earn $8,000/month gross and your proposed housing payment is $2,400 with $800 in other monthly debts:
- Front-End DTI = $2,400 ÷ $8,000 = 30%
- Back-End DTI = ($2,400 + $800) ÷ $8,000 = 40%
FHA Compensating Factors Explained
Compensating factors are strengths in your financial profile that can offset higher DTI ratios. FHA recognizes five primary compensating factors:
At least 3 months of mortgage payments in verified liquid assets (bank accounts, investments, retirement funds).
Documented income increase of at least $100/month or 5% in the past 12 months.
Sufficient money remaining each month after all housing and debt obligations are paid.
New payment is no more than $100 or 5% higher than current housing expense.
Continuous employment in same field for 2+ years with stable or increasing income.
Credit Score Requirements
FHA manual underwriting has specific credit score requirements that affect your down payment:
Credit Score 580+
Standard FHA terms
3.5%
Minimum Down
Credit Score 500-579
Higher down payment required
10%
Minimum Down
No Credit Score
Non-traditional credit accepted
3.5%
With 12mo payment history
Real FHA Manual Underwriting Success Stories
These real-world examples show how borrowers just like you qualified for FHA loans through manual underwriting when automated systems said "Refer."
The Situation:
Single mother with 48% DTI due to student loans and car payment
The Challenge:
AUS returned "Refer" due to DTI exceeding 43% standard limit
The Solution:
Manual underwriting approved with two compensating factors: 4 months of verified cash reserves ($12,000) and minimal housing payment increase
Result:
Approved for $285,000 FHA loan with 3.5% down ($9,975)
The Situation:
Filed Chapter 7 bankruptcy 3 years ago due to divorce, rebuilt credit to 598
The Challenge:
Bankruptcy on record plus self-employment income made automated approval impossible
The Solution:
Manual underwriting with 10% down payment, strong residual income of $1,800/month, and 3 years of stable self-employment
Result:
Approved for $225,000 FHA loan with 10% down ($22,500)
The Situation:
$95,000 salary but only 2 credit accounts and 8 months of credit history — no FICO score
The Challenge:
No FICO score available due to insufficient credit history. AUS couldn't process the application
The Solution:
Manual underwriting using non-traditional credit: 24 months of on-time rent payments, utility bills, and cell phone payments
Result:
Approved for $375,000 FHA loan with 3.5% down
Calculate Your FHA DTI
Use our free calculator to see if you qualify under FHA manual underwriting guidelines.
Try the FHA DTI CalculatorReady to Get Started?
FHA manual underwriting opens doors for borrowers who might otherwise be shut out of homeownership. Whether you're dealing with high DTI, recent credit events, or a thin credit file, there may be a path forward.
At NS Funding, we specialize in FHA manual underwriting and have helped hundreds of borrowers achieve their homeownership dreams. Our loan officers understand the nuances of compensating factors and know how to present your file in the best possible light.