What Are Common Lender Overlays

Common Lender Overlays With Most Mortgage Lenders

Mortgage Lender Overlays are additional mortgage requirements that are imposed by a mortgage 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 who were victims of the 2008 Real Estate and Mortgage Collapse where they had a prior bankruptcy and/or foreclosure and have been renting for years and trying to re-establish their credit have researched the FHA Guidelines and find out that they meet all of the FHA mortgage lending requirements to be told that they do not qualify by their local bank or mortgage lender they apply for a home loan. How can that be where FHA 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 a bank or mortgage lender does not have to take on a FHA Borrower and require higher mortgage lending standards from their borrowers than the minimum FHA mortgage lending guidelines. FHA mortgage borrowers need to realize that just because one FHA mortgage 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 many FHA mortgage lenders like myself where we do not have any mortgage lender overlays and just go off the automated findings of the Automated Underwriting System.

Common Lender Overlays: Credit Scores

FHA states that to qualify for a FHA insured mortgage home loan, the borrower needs a 580 FICO credit scores for a 3.5% down payment home purchase FHA home loan. However, most mortgage lenders will have mortgage lender overlays on credit scores where they will require a 640 FICO credit score even though FHA only requires a 580 FICO credit score. This is a lender overlay on credit scores that the bank and/or mortgage lender has. Other mortgage lenders may have credit score requirements of 620 credit scores and 600 credit score minimums. If you are told that you do not qualify for a FHA Loan because you do not meet the mortgage lenders overlays on credit scores and have at least a 580 FICO credit score, then contact me at 262-716-8151 or email me at gcho@gustancho.com.

Common Lender Overlays: 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 by adding the total monthly minimum payments a mortgage borrower has and dividing it by the mortgage 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 FHA mortgage borrowers with credit scores of 620 FICO credit scores or higher. If your credit scores are below 620 FICO credit scores, then the maximum debt to income ratios allowed is 43% DTI. However, many borrowers with credit scores of 620 FICO or higher go to their local bank or mortgage lender and are told that they do not qualify for a FHA Loan because their debt to income ratios are higher than 45% DTI. Most banks and many mortgage lenders will have debt to income ratio lender overlays capped at 43% DTI or 45% DTI. Some mortgage lenders may make an exception of allowing debt to income ratios to 50% DTI or even 55% DTI if the borrowers credit scores are greater than 680 FICO credit scores. If you are told that you do not qualify for a FHA Loan because your debt to income ratios are too high, please contact me at 262-716-8151 or email me 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: Verification Of Rent 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 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 the mortgage borrower’s mortgage loan application and will most overlook the borrower’s marginal credit history and higher debt to income ratios 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, provided by the mortgage lender instead of providing canceled checks and/or bank statements.

Common Lender Overlays: Charge Offs And Collections Accounts

FHA does not require for FHA mortgage loan 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 the FHA borrower’s debt to income ratio calculations. However, if the outstanding collection account balance is a large amount, the borrower can agree into a written payment agreement with the creditor and/or collection agency and 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 mortgage lenders will have mortgage lender 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 your charge off accounts or collection accounts, please contact me at 262-716-8151 or email me at gcho@gustancho.com. We have no lender overlays on collection accounts and/or charge off accounts and you do not have to pay off any outstanding collection accounts or charge off accounts to qualify for a FHA Loan.

Common Lender Overlays: FHA Loan 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 mortgage 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 and if you are told that you need to wait one or two years after a Chapter 13 Bankruptcy discharge, then contact me at 262-716-8151 or email me 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.

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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