What Are Mortgage Lender Overlays?

How Does Mortgage Lender Overlays Affect Loan Approval?

Mortgage Lender Overlays are mortgage qualification requirements that a lender implements on top of the minimum mortgage guidelines by FHA, USDA, VA, FANNIE MAE, and FREDDIE MAC. Every lender can set their own overlays on the following:

  • Credit Scores
  • Debt To Income Ratios
  • Collection Accounts
  • Charge Off Accounts
  • Waiting Period After Chapter 13 Bankruptcy Discharged Date
  • Credit Tradelines
  • Late Payments

There are lenders that do not have any overlays and will go just off the federal minimum lending guidelines on the particular loan program. If you have had prior bad credit such as a bankruptcy, foreclosure, deed in lieu of foreclosure, and/or short sale, there are certain mandatory requirements borrowers need to meet in order to qualify for a mortgage loan and there are no exceptions which mortgage lender you go to.

Waiting Period After Bankruptcy

There are waiting period after bankruptcies to qualify for a mortgage. The waiting period after bankruptcy depends on the type of bankruptcy and on the type of mortgage loan program.

  • If you have filed Chapter 7 bankruptcy, there is a mandatory 2 year waiting period from the discharge date of your bankruptcy in order to qualify for a FHA mortgage loan. 
  • Borrowers who filed Chapter 13 Bankruptcy can qualify for a FHA Loan one year in a Chapter 13 with Trustee approval.
  • There is no waiting period to qualify for a Chapter 13 Bankruptcy after the discharged date of the Chapter 13 Bankruptcy discharged date.
  • Conventional loan waiting period requires a 4 year waiting period after the discharged date of the Chapter 7 Bankruptcy.
  • There is a two year waiting period to qualify for a Conventional Loan after a Chapter 13 discharged date.
  • If you had a mortgage as part of your Chapter 7 Bankruptcy, there is a four year waiting period to qualify for a Conventional Loan from the discharged date of the Chapter 7 Bankruptcy even though the foreclosure was recorded after the Chapter 7 discharged date.
  • There is a two year waiting period to qualify for a VA Loan after a Chapter 7 Bankruptcy.
  • VA and USDA has the same waiting period requirements as FHA with regards to Chapter 13 Bankruptcy where borrowers can qualify for a VA Loan and/or USDA Loan one year in a Chapter 13 Bankruptcy Repayment Plan and no waiting period after a Chapter 13 Bankruptcy discharged date.

Waiting Period After Foreclosure and Short Sale

Home Buyers with a prior foreclosure and short sale can qualify for mortgages. Here are the guidelines in qualifying for mortgage loans after foreclosure and short sale:

  • There is a mandatory 3 year waiting period after a foreclosure, deed in lieu of foreclosure, and/or short sale to qualify for a FHA mortgage loan. 
  • The waiting clock starts from the actual recorded date of the foreclosure, deed in lieu of foreclosure, or short sale and not the date that you turned in your keys to your mortgage lender. 
  • For conventional loans, the waiting period to qualify for a conventional loan after a foreclosure is  7 years from the recorded date of foreclosure. 
  • There is a four year waiting period after a deed in lieu of foreclosure and short sale to qualify for a conventional loan.
  • If you had a mortgage or mortgages part of your Chapter 7 Bankruptcy, there is a four year waiting period to qualify for a Conventional Loan from the discharged date of your Chapter 7 discharged date even though the foreclosure or sheriff’s sale was recorded after the discharged date of your Chapter 7. However, the foreclosure needs to be finalized.

Minimum Credit Score To Qualify For FHA Loan

The minimum credit scores required to qualify for a FHA mortgage loan with a 3.5% down payment is 580 FICO.

  • Most lenders have overlays with credit scores where they may require a 620 credit score for FHA borrowers even though FHA only requires a 580 FICO.
  • Borrowers with credit scores between 530 FICO and 579 FICO need to have a 10% down payment.
  • Open collections and charge off accounts do not need to be paid and are allowed for FHA mortgage loans but again, it depends on the individual mortgage lender’s own internal overlays.
  • Many lenders have overlays on collections and charge offs where they require it to be paid where FHA does not require it to be satisfied.

Minimum Credit Score To Qualify For Conventional Loan

Minimum credit score to qualify for a conventional loan is 620 FICO. Again, many lenders have overlays on minimum credit scores on Conventional Loans where they will require higher than 620 credit scores for conventional borrowers.

Mortgage Lender Overlays

Just because you have paid your dues and meet the minimum lending guidelines on a particular loan program does not mean that you will qualify for a mortgage with all lenders. You need to hire a mortgage lender that has no overlays on the type of credit issues you have. The Gustan Cho Team specializes in helping borrowers with no overlays on FHA, VA, USDA, and Conventional Loans.

Majority of the mortgage lenders in this country have their own overlays which are additional requirements other than FHA and/or Fannie Mae’s minimum lending requirements.

Typical Lender Overlays

For example, the bare minimum FHA required credit score guidelines are a 580 FICO.

  • However, many FHA insured mortgage lenders have minimum credit score overlays such as 600, 620, 640, 660, or 680. 
  • Other mortgage lender overlays may be a minimum of 3 credit trade lines for at least 12 to 24 months. 
  • Credit trade lines are credit lines such as auto payments, credit cards, and other types of installment, or revolving credit lines. 
  • There are mortgage lenders who have a minimum of 4 credit trade lines that have been seasoned for at least a year.

Verification Of Rent

Other examples of mortgage lender overlays are that the borrower need verification of rent for a least a year.

  • The only acceptable means of verification of rent is by providing the mortgage loan underwriter proof of cancelled checks for the past 12 previous months.  A cash rent payment will disqualify verification of rent. 
  • Some lenders may accept a letter from a registered property management company. 
  • Individual landlords’ written receipts or letters are not accepted.

Overdrafts In Bank Statements

Other examples of mortgage lender overlays are that no overdrafts in any of the mortgage loan bank statements for the previous 12 months.  One $5 dollar overdraft can be a cause of a mortgage loan denial letter.

  • Any late payments, collections, charge offs, or derogatory credit after a bankruptcy and/or foreclosure can be a cause for a mortgage loan denial. 
  • Majority of mortgage lenders do not want to see a late payment after a bankruptcy and/or foreclosure no matter how long the bankruptcy and/or foreclosure is.
  • Any late payments in the past 12 months prior to applying for a mortgage loan is frowned upon and could affect your loan approval.
  • One or two late payments in the past 12 months is not a deal killer but the borrower would need a strong letter of explanation.

If Denied By A Mortgage Lender

If you got denied by a mortgage lender due to the mortgage lender’s overlays, no need to worry.

  • There is no reason why a pre-approved borrower should get a last minute mortgage loan denial or go through a stressful loan process.
  • The only reason for this to happen is because the loan officer did not properly qualify the borrower.
  • You should not have gotten a pre-approval if you did not meet the minimum lending guidelines required by FHA, VA, USDA, FANNIE MAE, FREDDIE MAC.
  •  If you got denied for a mortgage loan because you have not met the guidelines of FHA and/or Fannie Mae, there is a reason to worry. 
  • However, most mortgage lenders will not process your mortgage application if you do not meet FHA and/or Fannie Mae’s guidelines.
  • The Gustan Cho Team closes 100% of all of their pre-approvals. CrossCountry Mortgage does not have any overlays on government and Conventional Loans.

Home Loan With Bad Credit

If you have had prior bad credit such as the following:

  • Outstanding Collections and Charge Offs
  • Late Payments
  • Bankruptcy
  • Foreclosure
  • Deed in lieu of foreclosure
  • Short sale
  • Judgments
  • Tax Liens

If you have any of the above situations, your best bet is to hire a lender who has no overlays. If you have gotten denied for a residential mortgage loan or are told that you do not qualify for a mortgage due to overlays, contact Gustan Cho Associates at www.gustancho.com .

2017 Update To This Blog On Conventional Loans

Here are recent updates on mortgage guidelines for 2017:

  • The 2 year waiting period after a deed in lieu of foreclosure and short sale with 20% down payment on a conventional loan is no longer in effect as of August 2014. 
  • To qualify for a conventional loan after short sale and/or deed in lieu of foreclosure requires a 4 year waiting period
  • The new waiting period to qualify for a conventional loan after a deed in lieu of foreclosure and/or short sale is 4 years with 5% down payment.
  • Home Buyers who have not owned a home in the past three years are considered first time home buyers and can qualify as a first time home buyer and can put 3% down payment on a home purchase.  
  • Another new rule and regulation that was enacted is that if you have a mortgage part of bankruptcy, the waiting period to qualify for a conventional loan starts from the discharge date of the bankruptcy and not the recorded date of foreclosure or sheriff’s sale. 
  • This is great news for those who had their foreclosures recorded at a later date after the bankruptcy and had their mortgage part of their Chapter 7 Bankruptcy. However, the foreclosure needs to have been finalized.
The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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