FHA Guidelines Versus Lender Overlays On Home Mortgages

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FHA Guidelines Versus Lender Overlays On Home Mortgages

This BLOG On FHA Guidelines Versus Lender Overlays On Home Mortgages Was UPDATED On August 27th, 2018

FHA Guidelines Versus Lender Overlays:

On this article we will discuss FHA Guidelines Versus Lender Overlays.

  • All FHA mortgage lenders need to follow FHA Guidelines if they want the loans they originate and fund insured by the Federal Housing Administration
  • HUD, the parent of FHA, insures lenders against borrower defaulting on their FHA Loans
  • In order to be able to sell all of their FHA Loans they originate and fund to the secondary mortgage markets, all loans need to meet HUD Guidelines
  • If lenders does not abide by HUD mortgage guidelines and the FHA file misses any of lending guidelines when the FHA DE mortgage underwriter has issued a clear to close, then the Loan is not insurable and cannot be sold on the secondary market
  • Lenders who are mortgage bankers have a warehouse line of credit
  • They use this line of credit to fund borrower’s FHA Loans
  • Once they fund mortgage loans, lenders package these Loans and sell them to the secondary mortgage markets
  • With the proceeds of the sale of the FHA mortgage notes, they pay down their wholesale line of credit
  • This is done so they can free it up to use it to originate and fund more mortgage loans
  • HUD, the United States Department of Housing and Urban Development, is the parent of FHA and has created the HUD FHA 4000.1 Handbook
  • HUD 4000.1 FHA Handbook Guidelines is over 900 pages of FHA Guidelines and Requirements
  • Every single FHA Loan needs to meet HUD guidelines in order for it to be insurable and sellable on the secondary market
  • All FHA lenders follow HUD guidelines
  • However, most lenders have mortgage lender overlays which are lending requirements that are on top of the minimum HUD guidelines
  • Just because a mortgage loan applicant meets the minimum FHA mortgage lending guidelines does not mean that a bank or mortgage lender will originate and fund the FHA Loan

Some FHA mortgage lenders have tougher requirements than others. Banks are known to have tougher mortgage lending guidelines than most mortgage companies. Not all lenders have the same FHA Guidelines. Just because a borrower does not qualify with one lender does not mean they do not qualify with another lender.

FHA Guidelines Versus Lender Overlays On Credit Score Requirements

A substantial percentage of our borrowers at Gustan Cho Associates come to us because they either did not qualify with another lender or were denied a FHA Loan by another lender due to their overlays.

  • FHA Guidelines on credit scores is that to qualify for a 3.5% down payment FHA Loan, the minimum credit scores required by the mortgage loan borrower is 580
  • However, most banks and lenders have overlays on credit scores where they will not accept any borrowers without a 640 minimum credit score
  • Even though FHA will insure lenders on loan applicants with 580 credit scores, they do not care
  • The particular lender may want to set higher standards for their lending institution
  • They can create a higher credit score minimum requirement
  • This is not illegal and lenders are allowed to do this
  • Lenders are not required to accept the minimum FHA credit score requirements set by HUD

Borrowers looking for a FHA mortgage lender with no overlays on credit scores and will originate and fund FHA borrowers with credit scores down to 580, contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. Our national team of licensed and support mortgage professionals are available 7 days a week and have no overlays on government and conventional loans.

FHA Guidelines Versus Lender Overlays On Debt To Income Ratios

FHA Guidelines on Debt To Income Ratios are as follows:

  1. Borrowers with credit scores of 620 or higher, the maximum debt to income ratios required to qualify for a FHA insured mortgage loan is 46.9% front end and 56.9% back end DTI to get an approve/eligible per automated underwriting system
  2. Borrowers with credit scores of under 620 then the maximum debt to income ratios required to qualify for a FHA insured mortgage loan is 43% DTI in general to get an approve/eligible per automated underwriting system

However, many banks and lenders will have overlays on debt to income ratios. This is where they will cap debt to income ratios to 45% to 50% even though AUS allows up to a 56.9% DTI. Some lenders will go up to 50% debt to income ratios if borrowers has credit scores of higher than 680.

Borrowers with higher debt to income ratios and were told they do not qualify for a FHA Loan by other banks and lenders do to their overlays on debt to income ratios, contact me us at Gustan Cho Associates at 262-716-8151. Gustan Cho Associates Mortgage Group has overlays on debt to income ratios and can go up to 56.9% DTI back end and 46.9% front end. We just go off automated underwriting system findings and have zero overlays.

FHA Guidelines Versus Lender Overlays On Collection Accounts

FHA does not require borrowers to pay off collection accounts with outstanding balances.

  • However, most banks and lenders will require borrowers do not have any outstanding collection account balances in order for them to qualify for a FHA Loan with their institution
  • This is not the case and we do not require collection accounts with outstanding balances to be paid off
  • Charge offs and medical collection accounts are exempt from debt to income calculation requirements
  • With non-medical collection accounts with outstanding balances of greater than $2,000, FHA requires that 5% of the outstanding collection account balance be used to calculate the borrower’s debt to income ratios
  • If the 5% of the outstanding collection account balance is too much where the borrower cannot qualify for the FHA Loan due to higher debt to income ratios, HUD will allow borrowers to enter into a written payment agreement with the creditor and/or collection agency and set up a payment agreement
  • That monthly payment agreement will be used in lieu of the 5% of the outstanding collection account balance

Borrowers told they need to pay off all of collection accounts by a different lender and told they do not qualify due to overlays on collection accounts, please contact us at Gustan Cho Associates Mortgage Group 262-716-8151 or text us for faster response. We have no lender overlays on collection accounts and will be able to help borrowers with less than perfect credit and higher debt to income ratios. We have no overlays with FHA, VA, USDA, and Conventional Loans.

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