FHA Manual Underwriting: How to Get Approved with a 500 Credit Score in 2026

What is FHA Manual Underwriting?

In simple terms, manual underwriting is when a human, not a computer, decides if you can afford a home. While most loans are approved by an Automated Underwriting System (AUS) that evaluates your application in seconds, manual underwriting happens when your financial situation is a bit "outside the box" and needs a person to look at the nuances.

Why Does Manual Underwriting Happen?

When you apply for an FHA loan, your application first goes through an automated system. If the computer gives you a "Refer" status, it's not an automatic "No." It just means a human underwriter has to manually review your file.

Common reasons for a "Refer" status include:

• Thin credit file (no credit score or limited credit history)
• High debt-to-income ratio above standard limits
• Recent credit events like bankruptcy, foreclosure, or short sale
• Non-traditional income that the computer can't easily verify
• Complex financial situations that need human judgment

The Trade-Off

Manual underwriting requires more paperwork. You'll need to provide extra pay stubs, bank statements, and explanation letters to prove you're a responsible borrower. But for many people, it's the path to homeownership when the computer says "maybe."

Credit Score & Down Payment Requirements

FHA manual underwriting accepts credit scores as low as 500. Here's how the requirements break down:

Special Case: Identity of Interest

If you're buying a home from a family member or business associate (called an "Identity of Interest" transaction), you'll need a 15% down payment (85% LTV) regardless of your credit score.

DTI Limits Based on Compensating Factors

For manual underwriting, the FHA uses strict "tiers" based on your Compensating Factors—strengths in your application that offset risk.

What Are Compensating Factors?

Compensating factors are positive aspects of your financial profile that demonstrate you can handle the mortgage payment:

1. Verified Cash Reserves Having at least 3 months of mortgage payments in the bank after closing. This shows you have a financial cushion.

2. Significant Income Increase A recent pay raise of at least $100 per month or 5% from your previous position demonstrates upward financial mobility.

3. Residual Income Plenty of money left over each month after all bills are paid. This is calculated based on family size and geographic region.

4. Minimal Housing Payment Increase If your new mortgage payment is similar to your current rent, it shows you're already comfortable with that payment level.

5. Additional Income Not Used for Qualification Spouse's income, part-time work, or other income sources that weren't needed to qualify but provide extra security.

Documentation Requirements

Manual underwriting requires comprehensive documentation. Here's what you'll need:

Income Documentation - **Pay stubs** from the last 30 days - **W-2 forms** from the past 2 years - **Federal tax returns** with all schedules (2 years) - **Verification of Employment (VOE)** from your employer

Asset Documentation - **Bank statements** (2-3 months, all pages) - **Investment account statements** (if using for reserves) - **Gift letter** (if receiving down payment assistance)

Credit Documentation - **Letter of Explanation** for any derogatory credit items - **Proof of payment** for collections or judgments - **Bankruptcy discharge papers** (if applicable) - **Alternative credit** documentation (rent, utilities, insurance payments)

The Manual Underwriting Process

Step 1: Initial Application You submit your loan application with all required documentation.

Step 2: AUS Review The automated system reviews your application and returns a "Refer" status.

Step 3: Manual Review A human underwriter reviews your complete file, including: - All income and asset documentation - Credit history and explanations - Compensating factors - Property appraisal

Step 4: Conditions The underwriter may request additional documentation or clarification.

Step 5: Final Decision The underwriter makes a final approval or denial decision based on the complete picture.

Common Scenarios for Manual Underwriting

Scenario 1: No Credit Score If you've never had credit cards or loans, you may not have a credit score. Manual underwriting can use **alternative credit history**: - 12 months of on-time rent payments - 12 months of utility payments - 12 months of insurance payments - Other recurring payments

Scenario 2: Recent Bankruptcy FHA allows manual underwriting after bankruptcy with waiting periods: - **Chapter 7**: 2 years from discharge date - **Chapter 13**: 1 year of on-time payments with court approval

Scenario 3: High DTI If your debt-to-income ratio exceeds 43%, you'll need compensating factors to qualify at higher limits (up to 50% with two factors).

Scenario 4: Self-Employment Self-employed borrowers with complex income situations may benefit from a human reviewing their actual earning capacity.

Tips for Manual Underwriting Approval

1. Document Everything Provide thorough documentation upfront. The more information the underwriter has, the easier their decision.

2. Write Clear Explanation Letters For any credit issues, write a clear, honest letter explaining: - What happened - Why it happened - What you've done to prevent it from happening again

3. Build Your Compensating Factors Before applying: - Save at least 3 months of reserves - Document any income increases - Keep your housing payment increase minimal

4. Be Patient Manual underwriting takes longer than automated approval—typically 30-45 days to close.

5. Work with an Experienced Lender Not all lenders do manual underwriting. Find one who specializes in it and understands the guidelines.

FHA Loan Limits (2026)

FHA loan limits vary by county. For 2026:

Check your specific county's limit at [HUD's FHA Mortgage Limits page](https://entp.hud.gov/idapp/html/hicostlook.cfm).

Official FHA Guidelines

Manual underwriting requirements are detailed in the FHA Single Family Housing Policy Handbook (HUD 4000.1), Section II.A.5. This is the official source for all FHA lending guidelines.

[View FHA Handbook (HUD 4000.1)](https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh/4000.1)

Frequently Asked Questions

Is manual underwriting harder to get approved? Not necessarily harder, but it requires more documentation and takes longer. If you have compensating factors, approval rates are similar to automated underwriting.

Can I get a conventional loan with a 500 credit score? No. Conventional loans typically require a minimum 620 credit score. FHA manual underwriting is one of the few options for scores below 580.

How long does manual underwriting take? Expect 30-45 days from application to closing, compared to 21-30 days for automated approvals.

Do all lenders offer manual underwriting? No. Many lenders only accept automated approvals. You'll need to find a lender that specifically offers manual underwriting.

Can I refinance out of an FHA loan later? Yes. Many borrowers use FHA as a stepping stone and refinance into a conventional loan once their credit improves.

Next Steps

Ready to see if you qualify for FHA manual underwriting? Our team specializes in helping borrowers with non-traditional situations find the right path to homeownership.

[Check Your Eligibility](/get-started) | [Calculate Your DTI](/calculator/fha-dti)