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Lender Overlays On Government Mortgages Versus Agency Guidelines

Gustan Cho Associates
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This BLOG On Lender Overlays On Government Mortgages Versus Agency Guidelines Was PUBLISHED On February 24th, 2019

Government Loans are home loans that guarantee lenders in the event borrowers default on their home loans.

  • Lenders are able to offer low to no down payment on government-backed loans at low mortgage rates due to the government guarantee
  • If borrower default on government loans, the government agency will insure part of the loss lenders take

In order for FHA, VA, USDA to insure the loan, lenders must meet and follow the minimum agency guidelines of the loan program.

Types Of Government Loans

There are three types of government loans:

  • FHA Loans
  • VA Loans
  • USDA Loans

Government Loans are for owner occupant borrowers only. Borrowers cannot qualify for second home and/or investment property mortgages with government loans. Each government loan program has its own credit/income agency guidelines that lenders must meet.

Agency Guidelines Versus Lender Overlays On Government Mortgages

All mortgage lenders need to meet agency lending guidelines on government loans.

  • However, lenders can have Lender Overlays On Government Mortgages
  • Lender Overlays On Government Mortgages are additional mortgage guidelines set by individual lenders

Example Of Lender Overlays On Government Mortgages

Example of Lender Overlays On Government Mortgages are the following:

  • Higher credit scores than agency guidelines
  • Higher debt to income ratio requirements than government mortgage guidelines
  • Agency guidelines do not require outstanding collections and charged off accounts to be paid
  • However many mortgage companies have Lender Overlays On Government Mortgages on collections and charge off accounts
  • Collection and Charge offs may be required to be paid off by the lenders as part of their overlays when agency guidelines do not require them to
  • Common Lender Overlays On Government Mortgages by lenders is they may disqualify late payments in the past 12 months when borrowers got an AUS Approval with late payments in the past 12 months

Gustan Cho Associates Mortgage Group has no overlays on government and conventional loans. We are direct lenders with zero overlays. We just go off minimum agency guidelines and do not impose any other lending requirements above and beyond AUS Approval.

Case Scenarios Of Overlays Required By Lenders

Not all lenders who originate and fund FHA, VA, USDA Loans have the same mortgage guidelines.

  • All lenders need to meet agency guidelines by FHA, VA, USDA
  • But not all lenders have the same FHA, VA, USDA requirements
  • For example, HUD, the parent of FHA, requires a 580 credit score for home buyers purchasing a home with 3.5% down payment
  • These are the bare bones minimum FHA Guidelines
  • However, most banks require 640 credit scores by borrowers
  • Why are banks requiring 640 minimum credit score requirement when FHA requires 580 FICO?

The reason is that most banks have lender overlays on credit scores. It is perfectly legal for a bank and or lender to have higher credit/income standards (lender Overlays).

Lender Overlays On VA Loans

Another example is the U.S. Department of Veterans Affairs does not have a minimum credit score requirement or maximum debt to income ratio requirement.

  • However, most lenders require a 620 to 640 credit score requirement
  • Most lenders cap debt to income ratio at 41% to 50% on VA Loans even though VA does not require maximum DTI caps

Gustan Cho Associates at Loan Cabin Inc. has no overlays on VA Loans.

Finding Direct Lender With No Overlays On Government And Conventional Loans

Our business model at Gustan Cho Associates at Loan Cabin Inc. is being a direct lender with no overlays on government and conventional loans. Over 75% of our borrowers are folks who could not qualify at other lenders due to their overlays. Borrowers who need to qualify for mortgage with direct lender with no overlays, please contact us at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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