Lender Overlays Explained

Mortgage Lender Overlays Explained

There are qualification requirements that is required by mortgage borrowers in order for them to qualify for mortgage loans. Each mortgage loan program has their own mortgage lending guidelines. There are several types of mortgage loan programs. FHA Loans, VA Loans, USDA Loans, and Conventional Loans. Each one of these mortgage loan programs have their own mortgage lending requirements. We will discuss FHA Loans and Conventional Loans on this blog because these two mortgage loan programs are the most popular mortgage loan programs today in the United States.

The United States Department of Housing and Urban Development, often known as HUD by many, is the parent of FHA or Federal Housing Administration. FHA is not a mortgage lender but is a governmental agency that insures mortgage loans to mortgage lenders who follow and meet all of FHA mortgage guidelines. In order for FHA to insure a FHA Loan against borrower default, the mortgage lender needs to be FHA Approved and each loan the FHA approved mortgage lender originates and funds needs to meet FHA mortgage lending guidelines. FHA approved mortgage lenders do have to meet the minimum FHA Guidelines, however, FHA mortgage lenders can also impose and implement higher standards of their mortgage borrowers that surpass the minimum FHA Mortgage Lending Guidelines, which are called mortgage lender overlays . Most mortgage lenders do have mortgage lender overlays from anything from credit scores, to debt to income ratios, to waiting period requirements after a Chapter 13 Bankruptcy discharged date, to verification of rent, to credit tradelines, to collection accounts and charge off accounts. Just because FHA says it is okay does not mean that the FHA Mortgage Lender will accept that.  All FHA mortgage lenders can have different types of mortgage lender overlays. There are FHA mortgage lenders like myself that do not have any lender overlays and will just go off the approve/eligible per DU Findings. As long as the mortgage borrower meets the minimum lending guidelines and as long as they get an automated approval via the Automated Underwriting System and the borrower can meet the conditions on the automated approval, the file should close with a mortgage lender with no investor lender overlays.

Lender Overlays Explained: Overlays On Collection Accounts And Charge Offs

FHA does not require that outstanding collection accounts or charge off accounts be paid off by a FHA mortgage borrower. However, many mortgage lenders have lender overlays on collection accounts and charge off accounts where they require that all collection accounts and charge off accounts be paid off.  Same with Conventional Loans. As long as you are purchasing a single family owner occupying property, you do not have to pay off any outstanding collection accounts or charge offs no matter what the balance is. Unfortunately, most banks and many mortgage lenders do want collection accounts and charge off accounts paid off regardless of the lending program’s guidelines and are adamant with their lender overlays on collection accounts.

Lender Overlays Explained: FHA Loan After Chapter 13 Bankruptcy

FHA Guidelines On Mortgage After Chapter 13 Bankruptcy  state there are no waiting period to qualify for a FHA Loan after Chapter 13 Bankruptcy discharge date. However, most FHA Lenders have a mandatory waiting period of one or two years after a Chapter 13 Bankruptcy discharged date. This is a lender overlay and not a FHA requirement. Same with Conventional mortgage lenders. Fannie Mae requires a two year mandatory waiting period after a Chapter 13 Bankruptcy discharged date to qualify for a Conventional Loan. However, many Conventional mortgage lenders will require a four year waiting period for a borrower to qualify for a Conventional mortgage loan after a Chapter 13 Bankruptcy discharged date.

Lender Overlays Explained: Debt To Income Ratio Overlays

FHA will allow up to a 56.9% debt to income ratio for borrowers with a credit score of 620 FICO or higher. However, most mortgage lenders have debt to income ratio overlays on FHA Loans. There are mortgage lenders that will cap the debt to income ratio cap to 43% for borrowers who have credit scores of under 640 FICO. Other FHA mortgage lenders will cap the debt to income ratios to 45% for FHA borrowers who have credit scores of 680 FICO or under and then only limit the debt to income ratios to 50% DTI for FHA borrowers with credit scores of over 680 FICO credit scores. If you have higher debt to income ratios and are looking for a mortgage lender with no lender overlays on debt to income ratios, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I am available 7 days a week, evenings, weekends, and holidays to take your calls and answer all of your questions.

Lender Overlays Explained: Credit Score Overlays

Many FHA mortgage lenders have credit scores lender overlays for FHA Borrowers. FHA only requires that for a home buyer to qualify for a 3.5% down payment home purchase FHA insured mortgage home loan, the borrower just needs a 580 FICO credit score. However, almost all banks will require a 640 FICO credit score or higher. Most mortgage lenders will not take any borrowers with credit scores of under 620 FICO. This is called a lender overlay on credit scores. As long as you have a 580 FICO credit score, you can qualify for a FHA Loan. If you go to a mortgage lender or bank and are told that you do not qualify for a FHA Loan because you have lower credit scores, please do not hesitate to contact me at 262-716-8151.

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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