This BLOG On Common Mortgage Overlays Imposed By Lenders On Home Loans Was PUBLISHED On September 7th, 2019
There are two types of mortgage guidelines.
- Agency Guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac needs to be met by all borrowers
- However, the second type of mortgage guidelines are lender overlays
- Overlays are additional mortgage lending requirements above and beyond of agency guidelines
- This is why not all lenders have the same FHA, VA, USDA, Conventional Mortgage Guidelines
- Borrowers who are denied for an FHA Loan by one lender can get qualified with a different lender with no overlays
Gustan Cho Associates Mortgage Group has no overlays on government and conventional loans. There are Common Mortgage Overlays most lenders implement. We will discuss Common Mortgage Overlays by lenders on this blog.
Common Mortgage Overlays By Lenders
Anyone with high credit scores, no derogatory credit tradelines, and low debt to income ratios can qualify for a mortgage with any lender.
- However, borrowers with less than perfect credit, lower credit scores, and high debt to income ratio may need to find a lender with no overlays
- Some lenders have tougher lending requirements than other lenders
- There are many common mortgage overlays imposed by most lenders
- The number one reason for a last-minute mortgage denial or stress during the mortgage process is due to loan officers not properly qualifying borrowers
- Many loan officers qualified borrowers with agency guidelines but did not know their lender overlays
Common Mortgage Overlays include credit scores, outstanding collections, and charge-off accounts, and debt to income ratios.
Finding Another Lender After a Mortgage Denial
Most lenders add their own lending requirements on top of the minimum agency guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac.
- Overlays make it harder for borrowers with bad credit and/or high debt to income ratio qualify for home loans
- Mortgage denials are very common with lenders with overlays
- Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders due to their overlays
- Not all lenders have the same FHA, VA, USDA, Conventional Mortgage Requirements
One lender may say no while another will say yes.
Common Mortgage Overlays By Lenders
As mentioned, most lenders have overlays on government and conventional loans. Government Loans are FHA, VA, USDA Loans. Conventional Loans are often referred to as conforming loans. We will discuss common mortgage overlays on FHA, VA, USDA, and Conventional Loans in the following paragraphs.
Here are typical common mortgage overlays on government and conventional loans:
- Credit Scores
- Waiting Period after bankruptcy and/or housing event
- Types of properties
- Cash reserve requirements
- Overdrafts on bank statements
- Collections and charge-off accounts
- Gift funds
- Manual underwriting
Common Mortgage Overlays On FHA Loans
Minimum credit scores for 3.5% down payment FHA Loans is 580 FICO.
- However, common mortgage overlays on credit scores are lenders require a 620 to 640 FICO
- The U.S. Department of Housing and Urban Development (HUD) creates FHA Guidelines on FHA Loans in the FHA Handbook 4000.1
- Outstanding collections and charge off accounts do not have to be paid to qualify for FHA Loans
- However, most lenders will require collections and charge-off accounts to be paid as part of their lender overlays
- Many lenders do not accept manual underwriting on FHA Loans as part of their overlays
- FHA maximum debt to income ratio to get an approve/eligible per automated underwriting system is 46.9% front end and 56.9% back end
- Most lenders will cap DTI to 50%
- Gustan Cho Associates allows borrowers in a current Chapter 13 Repayment Plan to qualify for FHA Loans under manual underwriting
- There is no waiting period after Chapter 13 Bankruptcy discharge date
- Many lenders require a one to a two-year waiting period after Chapter 13 Bankruptcy discharged date to qualify for FHA Loans
- Some lenders have no gift funds allowed as an overlay
Borrowers can qualify for FHA Loans with under 580 credit scores with 10% down payment. However, most lenders will not accept any borrowers under 600 credit scores as part of their overlays.
Common Mortgage Overlays On VA Loans
The U.S. Department of Veterans Affairs sets the VA Guidelines in the Lenders Handbook – VA Pamphlet 26-7. VA does not have a minimum credit score requirement. VA does not have a maximum debt to income ratio cap on VA Loans.
Here are common mortgage overlays on VA Home Loans:
- The requirement of minimum credit scores of 620 to 640 FICO when VA does not require any minimum credit scores
- Many lenders will not honor a manual underwriting with refer/eligible automated underwriting system findings
- Most lenders will set a cap on debt to income ratio when the VA does not have a maximum debt to income ratio requirement
- Many lenders will require outstanding collections and charged-off accounts to be paid off when VA does not require it
- Many lenders will not allow borrowers in an active Chapter 13 Bankruptcy Repayment Plan to qualify for VA Loans
- Gustan Cho Associates allows borrowers in a current Chapter 13 Repayment Plan to qualify for VA Loans under manual underwriting
- There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify on VA Loans
Gustan Cho Associates Mortgage Group has zero overlays on VA Loans.
Common Mortgage Overlays On USDA Loans
USDA Loans offer 100% financing. Minimum credit score per USDA Guidelines to qualify for USDA Loans is 580 FICO. However, most lenders will have overlays on credit scores. Lenders with overlays will require 620 to 640 credit scores as part of their mortgage overlays.
Common Mortgage Overlays On Conventional Loans
- Typical lending overlays on conventional loans are on second and investment homes
- Minimum credit score requirements on conventional loans are 620 FICO
- However, many lenders can require a higher credit score requirement such as 660 to 680 FICO on second and investment homes
- Other common mortgage overlays by lenders on conventional loans are capping debt to income ratio to 43% to 45%
- Both Fannie Mae and Freddie Mac have a maximum debt to income ratio up to 50% LTV
Some lenders will require a higher credit score and lower debt to income ratios on condos. Condos are viewed as a riskier investment by lenders.
Overlays On Manufactured Homes
Manufactured homes are becoming increasingly popular. Most lenders do not want to lend on manufactured homes. VA and FHA borrowers often want to qualify for manufactured homes but run into lenders that have overlays. Contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response if you are running into trouble qualifying for home loans due to lender overlays. Or email us at firstname.lastname@example.org. The Team at Gustan Cho Associates Mortgage Group has no overlays on government and conventional loans and are available 7 days a week, evenings, weekends, and holidays.