Common Lender Overlays On Government And Conventional Loans

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Common Lender Overlays On Government And Conventional Loans

This BLOG On Common Lender Overlays On Government And Conventional Loans Was UPDATED On October 10th, 2018

Common Lender Overlays With Most Mortgage Lenders

Mortgage Lender Overlays are additional mortgage requirements that are imposed by a lender that is on top of the minimum mortgage lending guidelines by the particular mortgage loan program.

  • Many first time home buyers or home buyers fell victims of the 2008 Real Estate and Mortgage Collapse
  • They had a prior bankruptcy and/or foreclosure
  • Countless of home buyers have been renting for years
  • They have been trying to re-establish their credit
  • Many have researched the FHA Guidelines and find out that they meet all of the FHA mortgage lending requirements
  • They were often told they do not qualify by lenders they apply for a home loan

Agency Guidelines Versus Lender Overlays

How can that be where HUD states that to qualify for a 3.5% down payment FHA Loan that the borrower only needs a 580 credit score but the lender the borrower visits require a 640 credit score?

  • This is totally legal where lenders does not have to take on Borrowers that just meet Agency Guidelines
  • Lenders can require higher mortgage lending standards from their borrowers than the minimum FHA mortgage guidelines
  • Borrowers need to realize that just because one lender says that they do not qualify for a FHA Loan does not mean that they do not qualify for a FHA Loan elsewhere
  • There are lenders like myself where we do not have any mortgage lender overlays
    We just go off the automated findings of the Automated Underwriting System

Common Lender Overlays On Credit Scores

HUD, the parent of FHA,  states that to qualify for a FHA home loan, the borrower needs a 580 credit scores for a 3.5% down payment home purchase loan.

  • However, most lenders will have overlays on credit scores where they will require a 640 FICO
  • This holds true even though HUD only requires a 580 FICO credit score
  • This is a lender overlay on credit scores that the bank and/or mortgage lender can have
  • Other lenders may have credit score requirements of 620 credit scores and 600 credit score minimums

Home buyers told they do not qualify for a FHA Loan because do not meet the particular lender overlays on credit scores and have at least a 580 FICO credit score, contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.

Common Lender Overlays On Debt To Income Ratios

One of the most important factors in qualifying for a home loan is debt to income ratios.

Debt to income ratios is calculated as follows:

  • by adding the total monthly minimum payments borrower has
  • and dividing it by borrower’s monthly gross income
  • That number or percentage is the borrower’s debt to income ratio
  • The maximum debt to income ratios permitted with FHA Loans is 56.9% DTI for borrowers with credit scores of 620 FICO or higher
  • If credit scores are below 620 FICO credit scores, then the maximum debt to income ratios allowed is 43% DTI to get an approve/eligible per AUS
  • However, many borrowers with credit scores of 620 FICO or higher go to their local bank or lender and are told that they do not qualify for a FHA Loan
  • This is because their debt to income ratios are higher than 45% DTI
  • Most lenders will have debt to income ratio lender overlays capped at 43% DTI or 45% DTI
  • Some lenders may make an exception of allowing debt to income ratios to 50% DTI or even 55% DTI
  • They may add certain stipulations like if the borrowers credit scores are greater than 680 FICO credit scores that they will allow a higher debt to income ratio

Buyers told they do not qualify for a FHA Loan because their debt to income ratios are too high, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. I do not have any debt to income ratio overlays on FHA Loans and can go as high as 56.9% DTI if your credit scores are at least 620 FICO credit scores or higher.

Common Lender Overlays And Payment Shock

Verification Of Rent is one of the most important compensating factor a mortgage borrower can have.

  • Payment Shock is one of the most important factor an underwriter considers when evaluating and underwriting a borrower with bad credit and higher debt to income ratios
  • Payment Shock is on what a home buyers new mortgage payment will be from what he used to be paying as a renter
  • If the renter is paying $1,000 per month in rent and the renter’s new mortgage payment will be $1,000, there is zero payment shock
  • This is because the home buyers new housing payment will be the same as what he or she used to be paying
  • So the mortgage underwriter will feel real comfortable in approving borrower’s mortgage loan application
  • Underwriter will most overlook the borrower’s marginal credit history and higher debt to income ratios
  • This is because there is zero payment shock which is a HUGE compensating factor
  • However, in order for rental verification to be valid, the renter needs to provide 12 months timely canceled checks paid to their landlord
  • Or 12 months bank statements showing the rental payments being transferred from the renter’s bank account to the landlord’s bank account
  • If the renter is renting from a registered property management company, then the property manager of the property management company can complete and sign a verification of rent form, or VOR
  • VOR is provided by lenders and can be used instead of providing canceled checks and/or bank statements

Common Lender Overlays On Charge Offs And Collections Accounts

FHA does not require borrowers to pay off charge off accounts or collection accounts.

  • Medical collections and charge off accounts do not count in the calculations of the borrower’s debt to income ratios
  • Non-medical collection accounts that total more than $2,000, 5% of the outstanding unpaid collection account balance will be used towards the calculations of borrower’s debt to income ratio calculations
  • However, if the outstanding collection account balance is a large amount, the borrower can do the following:
    • agree into a written payment agreement with the creditor and/or collection agency
    • that figure will be used as a monthly debt payment in the calculations of the borrower’s debt to income ratios instead of the 5% of the outstanding collection account balance
    • There is no seasoning requirements on the amount of payments that needs to be made to the creditor and/or collection agency

Many lenders will have overlays that require all collection accounts be paid off and charge off accounts to be paid off.

  • This is not necessary
  • If you are told that you do not qualify for a FHA Loan unless you pay off outstanding charge off accounts or collection accounts, please contact us at 262-716-8151 or text us for faster response
  • Or email us at gcho@gustancho.com

We have no lender overlays on collection accounts and/or charge off accounts. Borrowers do not have to pay off any outstanding collection accounts or charge off accounts to qualify for a FHA Loan.

Common Lender Overlays On After Chapter 13 Bankruptcy

FHA have mandatory waiting periods to qualify for FHA Loans after Chapter 7 and Chapter 13 Bankruptcy.

  • There is two year waiting period after Chapter 7 Bankruptcy to qualify for a FHA Loan
  • There is no waiting period to qualify for a FHA Loan after Chapter 13 Bankruptcy
  • However, many lenders will have a one year waiting period or two year waiting period after Chapter 13 Bankruptcy for a borrower to qualify for a FHA Loan
  • This is a lender overlay
  • Borrowers told they need to wait one or two years after a Chapter 13 Bankruptcy discharge, then contact us at 262-716-8151 or text us for faster response
  • Or email us at gcho@gustancho.com
  • We have no lender overlays after a Chapter 13 Bankruptcy bankruptcy discharge date to qualify for a FHA Loan

All FHA Loan approvals after a Chapter 13 Bankruptcy discharged date that has been seasoned less than two years are all manual underwriting and all manual underwriting guidelines applies which includes verification of rent.

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