Importance Of What FHA Lender Overlays Are For Home Buyers
This BLOG On The Importance Of What FHA Lender Overlays Are For Home Buyers Was UPDATED On January 15, 2019
FHA loans are one of the most popular mortgage loans and have very lenient mortgage lending guidelines.
- The U.S. Department of Housing and Urban Development, HUD, is the parent of the Federal Housing Administration, FHA
- Many changes have been implemented on FHA loans after the real estate and mortgage meltdown of 2008
FHA loans are great for the following home buyers:
- First time home buyers
- Homebuyers with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
- Homebuyers with prior bad credit
- Homebuyers with no credit
- Homebuyers with high debt to income ratios
- Self-employed or 1099 wage earners
- Homebuyers with credit issues
A home buyer can qualify for an FHA loan with a minimum credit score of 500 FICO.
However, home buyers with a credit score between 500 FICO and 579 FICO, borrowers need a 10% down payment per HUD Guidelines.
FHA Loan Requirements
HUD allows home buyers to purchase a home with a 3.5% down payment as long as the home buyer’s credit scores are at least 580 FICO.
- FHA allows for home buyers with prior bad credit, judgments, tax liens, charge offs, and other credit issues
- Borrowers can have unsatisfied collection accounts and still qualify for an FHA loan without having to pay off old collection debts
- FHA ignores medical collection accounts and charge offs
- FHA also has a relaxed debt to income ratio requirements
- Maximum front end debt to income ratios required is 46.9% and maximum back end debt to income ratios required is 56.9% to get AUS Approval
- FHA also allows down payments and closing costs to be gifted
- 100% of the down payment and closing costs can be gifted to borrower from a family member and/or relative
HUD also allows for non-occupant co-borrowers to be added on the FHA loan in the event if the main borrower has little or no documented income.
FHA Mortgage Lenders
FHA is not a mortgage company nor does it have anything to do with FHA loans.
- FHA’s main role is to insure FHA loans to FHA approved mortgage lenders
- FHA approved lenders are private mortgage lenders like banks, credit unions, and mortgage companies
- These FHA approved mortgage lenders need to be approved with FHA in order for FHA to insure their mortgage loans
If I Meet FHA Lending Guidelines, Can I Get A Loan With Any Lenders With No Overlays?
No. If you meet FHA lending guidelines, you are eligible to qualify for an FHA loan but that does not mean any FHA approved FHA mortgage lender will approve you.
- Even though you meet all of the FHA guidelines, every lender will have their own set of FHA lending guidelines that are above and beyond the minimum lending FHA federal guidelines
- For example, even though FHA minimum credit score requirements are 580 FICO credit score to qualify for a 3.5% down payment
- most banks will not make any mortgage loan applicant who does not have a 640 FICO
- This additional lending requirement imposed by each individual lender is called an overlay,
- Do not get discouraged if one lender denies you an FHA loan due to their overlays
- As long as you meet minimum HUD guidelines, there will be a lender that will give you an FHA loan
- There are lenders, like myself, who specialize in funding loans and have no overlays
I just go off DU FINDINGS and/or LP FINDINGS.
Typical Lender Overlays
If a borrower does not qualify for an FHA loan with a particular FHA approved mortgage lender, ask the mortgage loan originator why they do not qualify for the FHA loan.
- Ask the mortgage loan originator whether is not meeting FHA guidelines or is it due to the particular lender’s FHA overlays
If, for example, the mortgage loan originator says that the reason is because of a low credit score of 580 FICO and their minimum credit score requirements are set at 640 FICO, then it is because that particular lender has overlays on credit scores.
Debt To Income Ratios On FHA Loans
Besides minimum credit score FHA lender overlays, other common FHA lender overlays that disqualify many FHA loan applicants are a debt to income ratios.
- FHA allows up to a 46.9% front end debt to income ratios and 56.9% debt to income ratios
- Many lenders have FHA lender overlays on debt to income ratios
- For example, one lender may have FHA lender overlays with regards to debt to income ratios where any mortgage loan applicants under a 640 FICO credit score may only have maximum debt to income ratios of 31% front end debt to income ratios and no greater than 43% debt to income ratios
FHA guidelines on debt to income ratios are as follows:
- If your credit scores are lower than 620 FICO, your front end debt to income ratios are capped at 31%
- The back end debt to income ratios is capped at 43%
- If your credit scores are greater than 620 FICO, your front end debt to income ratios are capped at 46.9% and back end debt to income ratios is capped at 56.9%
Collection Accounts And FHA Loans
Other overlays imposed by some FHA lenders are collection accounts.
- FHA does not require a mortgage loan borrower to pay off old collection accounts to qualify for an FHA loan
- However, lenders can have overlays that all collection accounts need to either have zero balances or have it paid off
The reason many lenders want old collection accounts with balances paid off is due to the fact that a collection account with a credit balance might turn into a judgment.
Overlays On Credit Tradelines
Many lenders require three credit tradelines that have been seasoned for at least 12 months. Credit Tradelines is not a HUD Guideline is normally NOT required to get an approve eligible per DU or LP FINDINGS. Credit Tradelines are lender overlays by individual lenders.
- However, some lenders may require that credit tradelines need to be seasoned for at least 24 months
FHA lending guidelines do not require judgments to be completely paid off. Having a written payment plan that has been seasoned at least 2 months is fine. Many lenders will not accept this and will want judgments paid off.
How Do I Find FHA Lender With No Lender Overlays?
As long as borrowers get an approved/eligible per DU FINDINGS and/or LP FINDINGS, Gustan Cho Associates will approve and close the borrower. We are national direct lenders with no overlays on FHA Loans. Borrowers who need to qualify for FHA Loans with a national lender with no overlays on government and/or conventional loans, please contact us at 262-716-8151 or text us for faster response. Or email us anytime, 7 days a week at firstname.lastname@example.org. We are available evenings, weekends, and holidays. All of our pre-approvals are full credit loan approvals signed off by our mortgage underwriters.