HUD FHA Guidelines Versus Overlays By Mortgage Lenders


This ARTICLE On HUD FHA Guidelines Versus Overlays By Mortgage Lenders Was PUBLISHED On September 8th, 2020

HUD FHA Guidelines Versus Overlays
Gustan Cho Associates

Understanding HUD FHA Guidelines Versus Overlays On FHA Home Loans:

  • HUD is an acronym for United States Department of Housing and Urban Development
  • Housing and urban development were funded by Lyndon B. Johnson in 1965
  • They were originally tasked with assisting communities with development and “fair and equal” housing for all
  • Creating suitable living environments for all Americans
  • Currently, housing and urban development are overseen by Secretary Ben Carson
  • By all accounts, it looks like somebody new will be in charge of housing in urban development in the upcoming year
  • This is not an easy job

Hundreds of thousands of Americans utilize the benefits of FHA and VA mortgage financing.

Lender Overlays Explained

In this blog, we will detail the difference between a guideline and a LENDER OVERLAYS:

  • Gustan Cho Associates Mortgage Group are mortgage professionals with many different loan programs
  • We offer mortgage financing without any additional lender overlays
  • This allows us to close difficult mortgage transactions
  • Most banks and lenders stay away from mortgages with lower credit scores and higher debt-income ratios, but we are here to help

In this article, we will cover and discuss HUD FHA Guidelines Versus Overlays on FHA Loans.

Understanding HUD FHA Guidelines Versus Overlays

Where can you find HUD guidelines?

  • The simple answer is Google, but you will find plenty of contradicting information
  • Mainly because the majority of lenders add overlays to the bare minimum HUD guidelines
  • These additional overlays can confuse borrowers
  • While we appreciate you doing research on your own, we strongly encourage you to call Gustan Cho Associates directly with questions
  • We will let you know if you are running into a guideline issue or simply a lender overlay issue
  • The best place to find guideline information is our blog archive

Our blogs are written directly off the guidelines of the 4000.1 FHA HANDBOOK and the VA HANDBOOK, nothing additional.

HUD FHA Guidelines Versus Overlays And Typical Lender Overlays

HUD FHA Guidelines Versus Overlays And Typical Lender Overlays

What are some common overlays?

All lenders need to meet the minimum HUD Agency Mortgage Guidelines.

  • However, lenders can have any types of overlays they want
  • One lender may have an overlay on one item but another lender may not
  • Lenders can have lender overlays on credit scores, DTI, Manual Underwriting, Collections, Charge Offs, and other items

We will discuss the most common lender overlays imposed by lenders in the following paragraphs.

HUD FHA Guidelines Versus Overlays On Debt-To-Income-Ratio

Debt to Income Ratio:

  • Debt to income is a MAJOR hurdle Americans must get over to qualify for a mortgage
  • Each loan program has different qualifications for debt to income ratios
  • Many lenders cap their MAX DTI requirements lower than the true guideline
  • For example, lenders will cap DTI at 50% for an FHA loan
  • Even though the Automated Underwriting System (AUS) will allow you to go up to 56.9% back end DTI
  • We underwrite directly to AUS
  • The same is true for a VA loan, technically on a VA mortgage, there is no maximum debt-to-income ratio requirement
  • However, you must pass residual income and underwriter discretion

In the past, Gustan Cho Associates have closed VA mortgages with back-end debt-to-income ratios above 62%.

HUD FHA Guidelines Versus Overlays On Credit Scores

Credit Score:

  • Credit score requirements are a common lender overlay in the industry
  • Many articles on the internet will lead you to believe you need a minimum of a 620 score for a VA mortgage
  • That is not the case
  • There is no minimum qualifying credit score for a VA mortgage
  • The interest rate is driven based on credit score, but you can qualify for a VA mortgage with a low score
  • According to the 4000.1 FHA HANDBOOK, you can get an FHA loan with a 500 credit score (with 10% down payment)

Many lenders have overlays and require a 620 or even 640 to qualify for an FHA mortgage. We go down to 500 with 10% down payment and 580 with a 3.5% down payment.

HUD FHA Guidelines Versus Overlays On Collections And Charge-Off Accounts

Collections and charge-off accounts:

  • Collections and charge-offs are a grey area and involve many overlays
  • Many lenders require Collections and charge-offs to be paid prior to closing
  • Once again, this is not a guideline
  • The guideline reads the mortgagee is not required to include charged-off accounts into the borrowers’ liabilities or debt for FHA mortgages
  • Any outstanding NON-MEDICAL collections are required to be counted against your DTI
  • The 5% rule goes into effect
  • Example; If you have a $2,500 collection for an old cell phone bill, 5% of $2,500 or $125 will be counted against your DTI ratio
  • VA sees collections and charge-offs slightly different
  • Once again, charge-offs are not required to be included against your debt to income ratio

However, NON-MEDICAL collections are. VA recently changed the guidelines for NON-MEDICAL collections, the lender must now verify if a payment is due

Please see our VA COLLECTION UPDATE BLOG for more details.

HUD FHA Guidelines Versus Overlays On Gift Funds

HUD FHA Guidelines Versus Overlays On Gift Funds

Gift funds:

  • The use of gift funds is acceptable for VA and FHA mortgages
  • They may not be counted for RESERVES, but they can be counted for the down payment and closing costs
  • The gift funds must come from an acceptable donor
  • Many lenders have additional overlays when it comes to the use of gift funds
  • This is due to default data and the use of gift funds, making the loan riskier
  • When you are dealing with your own money, you are more likely to pay your mortgage on time, according to years of data
  • Many lenders do not allow gift funds with credit scores below 620 (some banks 640)

The HUD guideline does not mention any credit score restrictions with the use of gift funds. We allow gift funds with credit scores down to 500.

Non-QM And Specialty Mortgage Programs Offered At Gustan Cho Associates Mortgage Group

Gustan Cho Associates offer a wide range of mortgage products, including many specialty loan programs.

Please contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Or email us at Gustan Cho Associates at for more details on our specialty loan programs.

Qualifying For Mortgage With A Direct Lender With No Lender Overlays On Government And Conventional Loans

Selecting a mortgage lender without overlays is an advantage for many clients. It will create fewer headaches during the process and help more Americans qualify for a mortgage. Gustan Cho Associates is a one-stop mortgage shop for all borrowers. We work with many clients for up to a year before they qualify for their dream home. 75% of our clients have been turned down by other lenders or are not getting the customer service they deserve. Give the Team at Gustan Cho Associates Mortgage Group a call today to start your mortgage applications!

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