Discouraged Mortgage Loan Borrowers Due To Lender Overlays

This BLOG On Discouraged Mortgage Loan Borrowers Due To Lender Overlays Was Written By Alexander Thomas Carlucci of Gustan Cho Associates

There are many mortgage loan programs available today for home buyers.

  • FHA Loans, Conventional Loans, USDA Loans, VA Loans, and Jumbo Mortgages
  • The whole mortgage industry went through a major overhaul after the 2008 Real Estate and Mortgage Meltdown
  • Many borrowers are not aware of new mortgage lending guidelines today
  • Qualifying for home loans today is way different than it was qualifying for mortgages prior to the 2008 Real Estate and Mortgage Meltdown
  • Mortgage loan products such as no docs and/or state income home loans no longer exist

In this article, we will discuss and cover Discouraged Mortgage Loan Borrowers Due To Lender Overlays.

Importance Of Documented Qualified Income

Why often borrowers are discouraged from mortgages

Documented income is an absolute requirement to qualify for any mortgage loan programs:

  • Many self-employed borrowers have a difficult time qualifying for loans because they deduct many expenses on their income tax returns which needs to be deducted from their gross income
  • Gustan Cho Associates has the all-new bank statement loan program for self-employed borrowers
  • 24 months bank statement deposits are averaged and used as monthly income
  • No income tax returns are required
  • There are mandatory credit requirements and debt to income ratio requirements to qualify for all home loan programs

The easiest and most lenient and most popular mortgage loan programs today are FHA Home Loans.

What Are FHA Home Loans

FHA Loans are the most popular mortgage loan program today due to their lenient credit and debt to income ratio requirements.

  • The Federal Housing Administration, FHA, is a subsidiary of the United States Department of Housing and Urban Development ( HUD )
  • FHA is in charge of FHA Loans
  • FHA is not a mortgage lender
  • FHA does not originate nor fund FHA Loans
  • FHA insures residential home loans against default by borrowers to private mortgage lenders such as banks and mortgage companies
  • HUD, the parent of FHA, will insure lenders from partial losses of defaulting homeowners as long as they are FHA Approved and follow HUD guidelines

HUD sets their minimum lending guidelines with regards to minimum credit scores required, maximum debt to income ratios permitted, collection accounts and prior bad credit, mandatory waiting period and foreclosure, and other credit and income guidelines.

Minimum FHA Mortgage Lending Guidelines

Minimum lending guidelines set by the Federal Housing Administration are the following:

  • Minimum credit score to qualify for FHA Loan is 580 for a 3.5% down payment home purchase FHA Loan
  • For borrowers with under 620 credit scores, the maximum debt to income ratios allowed is no greater than 43% debt to income ratio to get an approve/eligible per automated underwriting system
  • For borrowers who have credit scores greater than 620, the back end debt to income ratios is capped at 56.9% and the maximum front end debt to income ratio is capped at 46.9% to get AUS Approval
  • The front end debt to income ratio is the monthly principal, interest, taxes, and insurance (PITI) divided by the borrower’s monthly gross income

The back end debt to income ratios is the PITI plus all of the monthly minimum credit payments of the borrower divided by the borrower’s monthly gross income.

Discouraged Mortgage Loan Borrowers Qualifying For Mortgage After Bankruptcy And Foreclosure

What are the FHA's minimum guidelines for mortgage lending?

Homebuyers can qualify for a mortgage after bankruptcy and foreclosure:

Bankruptcy and Foreclosure:

  • Borrowers can qualify for FHA and VA Home Loans two years after a Chapter 7 Bankruptcy discharged date
  • Homebuyers can qualify for VA and FHA Loans one year into a Chapter 13 Bankruptcy repayment program with the Bankruptcy Trustee’s approval and have made timely payments in the past 12 months with all of their creditors
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for VA and/or FHA Loans
  • Borrowers can also qualify for FHA Loans three years after the recorded date of a foreclosure and/or deed in lieu of foreclosure and three years after the date of a short sale

The waiting period is two years after foreclosure, deed in lieu, and/or short sale on VA Loans.

Discouraged Mortgage Loan Borrowers Qualifying With Outstanding Collections And Charged Off Accounts

Collection Accounts:

  • Agency guidelines do not require borrowers to pay off an outstanding collection account to qualify for mortgages
  • Borrowers do not have to pay off old collection accounts with balances
  • Medical collection accounts and charge offs are exempt
  • Borrowers more than $2,000 of unpaid non-medical collection accounts, then 5% of the unpaid collection balance is used as a monthly debt payment obligation
  • This holds true even though borrowers do not have to pay, in calculating debt to income ratios
  • For those with high unpaid balances, they can make a written payment agreement with the collection agency and/or creditor and agree on a monthly payment plan

That payment plan can be used to calculate the monthly payment in lieu of 5%.

Mortgage Guidelines On Judgments And Tax-Liens

Judgments and Tax Liens:

  • Borrowers can qualify for judgments and tax liens without having to pay off the judgments and tax liens
  • This holds true as long as they have a written repayment agreement and three months of payments have been made to the judgment creditor and/or Internal Revenue Service

Discouraged Mortgage Loan Borrowers Due To Mortgage Denial

What are the guidelines regarding mortgages against tax judgments and liens?

Many borrowers who meet the minimum mortgage guidelines still get denied or cannot qualified for a Home Loan by lenders. These applicants get discouraged and give up in their dreams of buying a home. Just because borrowers get denied or do not qualify by one lender does not mean you cannot qualify for a Home Loan with another lender. How can this be? Most lenders have mortgage lender overlays which are lending guidelines that exceed the minimum agency lending guidelines. For example, FHA guidelines on minimum credit scores to qualify for a 3.5% down payment home loan is 580. However, even though FHA guidelines are 580 FICO, most lenders have their own lending standards. They set their minimum credit scores of 640 and refuse everyone with credit scores under 640. This is totally legal and is called lender overlays. Discouraged mortgage loan borrowers who got denied or could not qualify for an FHA loan due to their overlays, contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. We have a national reputation for not having any overlays on government and conventional loans. Over 75% of our borrowers are folks who were told they do not qualify for FHA Loan due to overlays. Our team at Gustan Cho Associates are available 7 days a week, including holidays, and late evenings.

This BLOG On Discouraged Mortgage Loan Borrowers was updated on November 25th, 2020 by staff at Gustan Cho Associates

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