Lender Overlays Explained On Government And Conventional Loans
This Article Is About Lender Overlays Explained On Government And Conventional Loans
Mortgage Lender Overlays Explained:
- The two most common home mortgage programs are government and conventional loans
- Lenders need to make sure borrowers meet the minimum agency mortgage guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac
- However, lenders can have higher lending requirements that are above and beyond agency mortgage guidelines called lender overlays
- Most lenders have lender overlays on just about anything
- Common lender overlays imposed by lenders are credit scores, debt to income ratio, collections/charged-off accounts, gift funds, reserves, and other factors lenders consider high risk
- For example, HUD and VA allow manual underwriting
- However, some lenders may not allow manual underwriting because they may not want to take on the added risk
- It is perfectly legal for lenders to have lender overlays
- Most lenders have lender overlays on government and conventional loans
Gustan Cho Associates does not have any lender overlays on FHA, VA, USDA, and Conventional loans.
Government-Backed Home Mortgages
There are qualification requirements that are required by mortgage borrowers in order for them to qualify for mortgage loans.
- Each mortgage loan program has its own mortgage lending guidelines called agency guidelines
- There are several types of mortgage loan programs
Government Loans are the following:
- FHA Loans
- VA Loans
- USDA Loans
The above three loan programs are called government-backed mortgages. They are called government loans because of the government guarantee lenders get in the event borrowers default. If a borrower defaults on a government loan, the government agency will insure and/or partially guarantee the lender against the loss sustained by the lender. However, lenders need to make sure they follow the agency mortgage guidelines on the government loans they originate and fund.
In this article, we will discuss and cover Lender Overlays Explained On Government And Conventional Loans.
Conventional Versus Government Mortgages
Conventional Loans are not guaranteed by any government agency. However, in order for Fannie Mae and/or Freddie Mac to purchase these loans by lenders, they need to conform. Conventional Loans are called conforming loans because they need to Conform To Fannie Mae and/or Freddie Mac Guidelines.
Each one of these mortgage loan programs has its 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.
Lender Overlays Explained On FHA Home Loans
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
- It is a governmental agency that insures mortgage loans to lenders who follow and meet all of FHA mortgage guidelines
- In order for HUD to insure an FHA Loan against borrower default, lenders need to be FHA Approved
- Each loan the lender originates and funds needs to meet FHA mortgage lending guidelines
- If borrowers do have to meet the minimum FHA Guidelines the loan will not be insured by HUD
- All FHA lenders need to meet minimum agency HUD Guidelines
- However, they can also impose and implement higher standards of their mortgage borrowers that surpass the minimum HUD Mortgage Lending Guidelines
The additional guidelines on top of agency guidelines are called mortgage lender overlays.
Most lenders do have overlays from anything from the following:
- credit scores
- to debt to income ratios
- waiting period requirements after a Chapter 13 Bankruptcy discharged date
- verification of rent
- credit tradelines
- collection accounts and charge off accounts
Agency Versus Lender Overlays Imposed By Lenders
Just because HUD says it is okay does not mean that a Lender will accept that.
- All lenders can have different types of overlays
- There are lenders like myself that do not have any lender overlays
- We will just go off the approve/eligible per DU Findings
- As long as the borrower meets the minimum lending guidelines we are set to go
As long as borrowers get an automated approval via the Automated Underwriting System and can meet the conditions on the automated approval, the file should close with lenders with no overlays.
Lender Overlays Explained On Collection Accounts And Charge Offs
HUD does not require that outstanding collection accounts or charge off accounts be paid off by borrowers.
- However, many lenders have overlays on collection accounts and charge off accounts
- They require that all collection accounts and charge off accounts be paid off even though FHA does not require it
- 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 lenders do want collection accounts and charge off accounts paid off regardless of the lending program’s guidelines
- They are adamant with their lender overlays on collection accounts
Lender Overlays Explained On FHA Loan After Chapter 13 Bankruptcy
FHA Guidelines On Mortgage After Chapter 13 Bankruptcy state there is no waiting period to qualify for an FHA Loan after Chapter 13 Bankruptcy discharged date.
- However, most 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 an 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 lenders will require a four year waiting period for a borrower to qualify for a conventional loan after a Chapter 13 Bankruptcy discharged date.
Lender Overlays Explained On 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 lenders have a 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
- Other lenders will cap the debt to income ratios to 45% for borrowers who have credit scores of 680 FICO or under
- Then only limit the debt to income ratios to 50% DTI for borrowers with credit scores of over 680 FICO credit scores
- If you have higher debt to income ratios and are looking for a lender with no overlays on debt to income ratios, please contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response.
- Or email us at [email protected]
We are available 7 days a week, on evenings, weekends, and holidays to take your calls and answer all of your questions.
Credit Score Overlays By Lenders
Many lenders have credit scores lender overlays for Borrowers. HUD only requires that for a home buyer to qualify for a 3.5% down payment home purchase FHA loan. Homebuyers just need a 580 FICO credit score. However, almost all banks will require a 640 credit score or higher. Most lenders will not take any borrowers with credit scores of under 620. This is called overlays on credit scores. As long as borrowers have a 580 FICO credit score, they can qualify for an FHA Loan. If you go to a mortgage lender or bank and are told that you do not qualify for an FHA Loan because of lower credit scores, please do not hesitate to contact us at 262-716-8151 or text us for a faster response. Or email us at [email protected]