This guide covers common mortgage overlays on government and conventional loans. There are two types of mortgage guidelines. All borrowers must meet Agency Guidelines by FHA, VA, USDA, Fannie Mae, and Freddie Mac—lender overlays by mortgage companies. Mortgage lenders can impose their lending requirements above and beyond the minimum agency guidelines called lender overlays. Most lenders have the second type of mortgage guideline lender overlays.

What Are Lender Overlays?

Lender overlays are additional mortgage lending requirements above and beyond agency guidelines lenders can impose. Lenders can impose lender overlays on just about anything. This is why not all lenders have the same FHA, VA, USDA, and Conventional mortgage guidelines.

Solution For Borrowers After Mortgage Loan Denial by Lenders

Borrowers who one lender denies an FHA loan can qualify with a different lender with no overlays. Gustan Cho Associates Mortgage has no lender overlays on government and conventional loans. There are common mortgage overlays most lenders implement. We will discuss common mortgage overlays by lenders in 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 a high debt-to-income ratio may need to find a lender with no overlays. Some lenders have tougher lending requirements than other lenders.

Types of Lender Overlays by Mortgage Companies

Most lenders impose many common mortgage overlays. 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, charge-off accounts, and debt-to-income ratios.

Finding Another Lender After a Mortgage Denial

Most lenders add their lending requirements to the minimum agency guidelines by FHA, VA, USDA, Fannie Mae, and Freddie Mac.

Overlays make it harder for borrowers with bad credit or high debt-to-income ratios to qualify for home loans. Mortgage denials are very common with lenders with overlays.

Over 80% of our borrowers at Gustan Cho Associates could not qualify at other lenders due to their overlays. Not all lenders have the same FHA, VA, USDA, and 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, and USDA loans. Conventional loans are often referred to as conforming loans. The following paragraphs will discuss common mortgage overlays on FHA, VA, USDA, and Conventional loans.

Lender Overlays on Government and Conventional Loans

Here are typical common mortgage overlays on government and conventional loans:

• Credit Scores
• Debt-to-income
• Waiting Period after bankruptcy or housing event
• Co-borrowers
• 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

The minimum credit score for 3.5% down payment FHA loans is 580 FICO. However, common mortgage overlays on credit scores are lenders requiring 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.

Common Mortgage Overlays on Manual Underwriting

Many lenders do not accept manual underwriting on FHA loans as part of their overlays. FHA’s 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 Chapter 13 Repayment Plan to qualify for FHA loans under manual underwriting.

Common Mortgage Overlays on Chapter 13 Bankruptcy

There is no waiting period after the Chapter 13 Bankruptcy discharge date. Many lenders require a one- to two-year waiting period after the discharge date of Chapter 13 bankruptcy 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 a 10% down payment. However, most lenders will not accept 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.

Common Mortgage Overlays on VA Credit Scores and Debt-to-Income Ratio

In this section, we are covering common mortgage overlays on VA loans. The requirement of minimum credit scores is 620 to 640 FICO, while the 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 cap the 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 the VA does not require it.

Many lenders will not allow active Chapter 13 Bankruptcy repayment plan borrowers to qualify for VA loans. Gustan Cho Associates allows borrowers in a Chapter 13 repayment plan to qualify for VA loans under manual underwriting. There is no waiting period after the Chapter 13 Bankruptcy discharge date to qualify for VA loans. Gustan Cho Associates has zero overlays on VA loans on FHA, VA, USDA, and Conventional loans.

Common Mortgage Overlays on USDA Loans

USDA Loans offer 100% financing. The 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

Fannie Mae Single Family Selling Guide and Freddie Mac’s Seller/Servicer Guide set mortgage guidelines on conventional loans. Typical lending overlays on conventional loans are on second and investment homes. The minimum credit score requirement on conventional loans is 620 FICO. However, many lenders can require a higher credit score, such as 660 to 680 FICO, on second and investment homes.

Common Mortgage Overlays on Debt-to-Income Ratio on Conventional Loans

Other common mortgage overlays by lenders on conventional loans are capping the debt-to-income ratio to 43% to 45%. Fannie Mae and Freddie Mac have a maximum debt-to-income ratio of 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 800-900-8569 or text us for a faster response if you run into trouble qualifying for home loans due to lender overlays. Or email us at gcho@gustancho.com. The Team at Gustan Cho Associates has no overlays on government and conventional loans and is available seven days a week, evenings, weekends, and holidays.