Difference Between HUD Guidelines Versus FHA Lender Overlays

This BLOG On Difference Between HUD Guidelines Versus FHA Lender Overlays Was UPDATED On January 6th, 2018

Many home buyers, especially first time home buyers, are often under the belief that all FHA Lenders have the same FHA Mortgage Guidelines. Just because a borrower may not qualify with one lender does not mean that they do not qualify for a FHA Loan. All lenders with overlays has different mortgage guidelines on FHA Loans.

  • This is often not the case
  • There is difference between HUD Guidelines Versus FHA Lender Overlays
  • Under HUD Guidelines on credit scores, HUD requires a 580 credit score for 3.5% down payment FHA Loans
  • However, most banks require 640 credit scores while other lenders may require 620 credit scores
  • The higher credit score requirements is called FHA Lender Overlays On Credit Scores
  • There are many overlays a lender can impose

The good news is that are lenders like The Gustan Cho Team at USA Mortgage that has no overlays on FHA Loans. USA Mortgage only goes off HUD Guidelines and has ZERO OVERLAYS on government and conventional loans.

About The Federal Housing Administration And FHA Loans

The United States Housing and Urban Development, also known as HUD to most, is the parent government agency of the Federal Housing Administration  (FHA).

  • FHA is not a lender
  • FHA is a government agency whose role is to promote home ownership in the U.S. by insuring private lenders on FHA Loans
  • FHA insures FHA Loans that banks and private lenders originate and fund that go into default and foreclosure
  • HUD will insure the loss on lenders that followed HUD Guidelines when originating and funding loans
  • Due to this guarantee, banks and lenders are able to offer FHA insured home loans to hard working American Families with only 3.5% down payment and with less than perfect credit

More On HUD Guidelines Versus FHA Lender Overlays

HUD Guidelines Versus FHA Lender Overlays: There are two separate types of lending guidelines

  1. HUD Guidelines
  2. Lender Overlays

HUD Guidelines Versus FHA Lender Overlays: HUD Guidelines are FHA Guidelines that all lenders need to follow in order for FHA Loans they originate to be insurable. FHA Lender Overlays are mortgage guidelines that is above and beyond those of FHA Guidelines that lenders can impose. All lenders need to follow HUD Guidelines.

However, any lender can have higher mortgage lending requirements than those of FHA Guidelines:

  • FHA loans are insured by HUD and enables FHA mortgage lenders to provide FHA loans
  • FHA loans make home ownership possible to many Americans by only requiring a 3.5% down payment on a home purchase
  • FHA loan programs also make home ownership possible to home buyers with less than perfect credit
  • HUD make it possible for those who have had an economic event in the past such as a bankruptcy and/or foreclosure become homeowners as long as they have passed the mandatory waiting requirement

FHA Mortgage Programs

  • The Federal Housing Administration also offers the following:
    • FHA streamline refinance mortgage loanS
    • FHA refinance mortgage loans
    • FHA cash-out refinance mortgage loans
    • Home purchase loans to home buyers who are interested in 2 to 4 unit owner occupied multi unit properties
  • FHA 203k Loans
  • Reverse Mortgages

Owner Occpancy

  • FHA loans are only available to owner occupied properties only
  • Second home and investment home financing do not qualify for FHA insured mortgage loans

FHA Mortgage Lenders

The Federal Housing Administration is not a mortgage lender.

  • It is a government agency under the United States Housing and Urban Development that insures FHA approved mortgage lenders on all of their FHA loans they originate
  • FHA mortgage lenders are private lenders such as banks and mortgage bankers that need to abide by FHA guidelines in originating FHA loans in order to be insurable by FHA

FHA Mortgage Lender Overlays

Each FHA mortgage lender has its own mortgage lender overlays.

  • Overlays are additional guidelines the mortgage lender has that surpasses the minimum FHA guidelines set by the Federal Housing Administration
  • Home buyers who have minimal credit scores and prior credit issues can qualify for FHA Loans
  • All borrowers must minimum standards of FHA guidelines

Minimum FHA Mortgage Guidelines

Minimum FHA guidelines are the following:

  • 500 credit scores to qualify
  • Any mortgage loan borrower between 530 FICO and 579 FICO scores, 10% down payment is mandatory.
  • 580 to 619 credit scores, 3.5% down payment is required and maximum debt to income ratios cannot exceed 43% back end debt to income ratios.
  • 620 credit scores and higher, 3.5% down payment and 56.9% debt to income ratios allowed as long as approve eligible per DU FINDINGS
  • 2 year waiting period after a bankruptcy discharge; 
    • 3 year waiting period after foreclosure, deed in lieu of foreclosure, short sale
    • Foreclosure and deed in lieu of foreclosure waiting period starts from the recorded date of the sheriff’s sale or the date the deed was transferred out of homeowners name into the mortgage lenders name

FHA Guidelines On Collections And Derogatory Credit

  • Open collections are allowed
  • Restrictions with judgments and tax liens
  • Home buyers with judgment and/or tax liens can qualify
  • But they need a payment agreement with the judgment creditor or the IRS for tax liens and proof of a minimum of three months payment
  • Proof is provided by providing mortgage underwriter three months cancelled checks
  • Rental verification may be required by providing 12 months cancelled checks to landlord unless the renter is renting from a property management company
  • Then a letter from the property management company is sufficient
  • Re-established credit and no late payments after bankruptcy and/or foreclosure may be required to get an approve eligible via Fannie Mae’s Automated Underwriting System
  • Many FHA mortgage lenders may impose their own mortgage lender overlays such as a minimum of 3 to 4 credit tradelines for a minimum of 12 to 24 months
  • Needs to be owner occupied properties
  • One to Four units
  • Gifts funds for down payment are allowed by the donor of the down payment needs to be a relative and there cannot be any repayment agreement are allowed

FHA Condominium Loans: FHA Approved Condos Only

It is getting more and more difficult to purchase a condominium with FHA Loans. However, condo buyers can buy condominiums with FHA loans but the condominium complex needs to be HUD Approved. More and more condo complex are not renewing their HUD Approval because of the costs involved.

To see if the particular condo is FHA Loans approved Visit https://entp.hud.gov/idapp/html/condlook.

Qualifying With Direct Lender With No Overlays On FHA Loans

Over 75% of our borrowers at The Gustan Cho Team at USA Mortgage are folks who either gotten a last minute mortgage loan denial or are stressing over their mortgage process with another lender.

  • The only reason for a mortgage denial or stress during the mortgage process is because the loan officer did not properly qualify the borrower
  • Most mortgage lenders have overlays
  • USA Mortgage is one of the few lenders nationally with zero overlays on government and conventional loans

Here are HUD Guidelines Versus FHA Lender Overlays & Typical Common Overlays

  • Overlays on credit scores
  • Overlays on debt to income ratios
  • Overlays on collections and charge offs
  • Overlays on FHA Loans During And After Chapter 13 Bankruptcy With No Waiting Period

Home Buyers who need to qualify with a direct FHA Lender with no lender overlays can contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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