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Lender Overlays Versus Agency Guidelines On Home Loans

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This Blog On Lender Overlays Versus Agency Guidelines On Home Loans Was PUBLISHED On January 6th, 2019

All mortgage lenders need to meet agency mortgage guidelines.

  • Agency guidelines are those from HUD, VA, USDA, Fannie Mae, Freddie Mac
  • However, mortgage lenders can have their own guidelines that surpass agency lending guidelines
  • These additional lending requirements that is above and beyond those of agency guidelines are called lender overlays
  • Most home buyers think that all lenders have the same lending requirements when it comes to FHA, VA, USDA, Conventional Loans
  • This is not the case
  • Every lender can have different mortgage guidelines on government and conventional loans
  • All lenders do need to meet agency guidelines
  • However, lenders can have overlays
  • One lender can have overlays on credit scores and not debt to income ratios
  • Another lender may have overlays on DTI but not credit scores
  • Not all lenders are created equal

Gustan Cho Associates at Loan Cabin Inc. is one of the very few national lenders with no lender overlays on government and conventional loans.

Denied By Lender Due To Lender Overlays Versus Agency Guidelines

Often times, home buyers will do their own research when trying to qualify for home loan. They research HUD Guidelines and find out the following:

  • They meet the 580 credit score requirements to qualify for 3.5% down payment FHA Loan
  • They do not have the 3.5% down payment but they understand that HUD allows family member to gift them the down payment
  • Their parents are willing to gift them the down payment
  • They have older outstanding collections and charged off accounts but have been timely with all of their payments in past 12 months
  • They find out that FHA does not require them to pay outstanding charged off accounts and/or charged off accounts

These folks are excited and take a day off from work so the couple can go visit a loan officer at their local bank. They become stressed after the loan officer at their local bank tell them they do not qualify for a FHA Loan.

The reason they do not qualify is due to the following reason:

  • Minimum credit score to qualify for FHA Loans is 640 at the bank
  • These folks have a 580 credit score
  • All collections and charged off accounts needs to be paid in full and seasoned for two years after it has been paid
  • The above is not a FHA Guideline but the bank’s own overlay on collections/charge offs
  • The loan officer at the bank told the couple that they cannot have gifted funds for down payment
  • Again, HUD does allow gift funds for down payment
  • However, many lenders and banks may not accept gifted funds as part of their overlays

The above case is a typical case scenario of our borrowers at Gustan Cho Associates Mortgage Group. Over 75% of our borrowers are folks who could not qualify at other lenders due to their overlays. Luckily, The Gustan Cho Team at Loan Cabin Inc. has zero overlays on government and conventional loans.  Unfortunately many borrowers give up after being denied by a lender with overlays. Most of our borrowers at Gustan Cho Associates are tenacious and do not give up. After their loan denial, they due their due diligence and find us on the internet and/or through our national referral network. 

Typical Lender Overlays Versus Agency Guidelines 

Listed below are typical Lender Overlays Versus Agency Guidelines imposed by many lenders

  • Requiring higher credit scores than the minimum agency guidelines
  • Lower debt to income ratio requirements than agency guidelines
  • Not allowing manual underwriting on VA and FHA Loans
  • Requiring Borrowers to pay outstanding collections and charge off accounts
  • Longer waiting period after housing event and/or bankruptcy than agency guidelines
  • Not allowing gift funds unless borrowers have a certain credit score
  • Not allowing co-borrowers unless borrowers have a certain credit score
  • Higher credit standards on two to four unit properties and condominiums
  • Overdrafts in bank statements are allowed but lenders can have overlays not allowing bank overdrafts
  • Lenders can require verification of rent even though AUS does not condition for it
  • Requiring borrowers to have reserves even though AUS does not condition for it

Lender Overlays Versus Agency Guidelines On VA Loans

The U.S. Department of Veterans Affairs does not have any minimum credit score requirements nor debt to income ratio requirements.

  • Gustan Cho Associates at Loan Cabin has approved and closed countless of borrowers on VA Loans with credit scores in the 500’s and 60% debt to income ratios
  • However, most lenders have overlays on VA Loans

Typical VA Lender Overlays Versus Agency Guidelines

Here are typical VA Lender Overlays Versus Agency Guidelines on VA Home Loans:

  • Requiring minimum credit scores of 620 or higher when VA does not have minimum credit score requirements
  • Having maximum debt to income ratio when VA does not have debt to income ratio caps
  • Not allowing manual underwriting
  • Not accepting borrowers in an active Chapter 13 Bankruptcy Repayment Plan after 12 monthly payments to Trustee
  • Requiring two year waiting period after Chapter 13 Bankruptcy discharged date when VA has no waiting period requirements

Reason Why Lenders Have Mortgage Overlays

The main reason why lenders have overlays on government and conventional loan programs is to reduce layers of risk.  Lenders believe that agency guidelines are too lax and believe they should have tougher lending requirements. They are allowed to do so. However, Gustan Cho Associates at Loan Cabin Inc. has a different business model. We feel as long as borrowers can meet minimum agency guidelines, we should approve and close on their home loans. Not too many lenders have this business model. For borrowers who need a direct lender with no overlays, please contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. Our team of licensed and support personnel is available 7 days a week, evenings, weekends, and holidays.

This BLOG On Lender Overlays Versus Agency Guidelines Was Written By Gustan Cho, National Managing Director at Loan Cabin Inc. Contributing Associate Editors were Massimo Ressa, Chief Executive Officer of Loan Cabin Inc., Piotr Bieda Chief Operating Officer of Gustan Cho Associates, Michael Gracz National Sales Manager of The Gustan Cho Team at Loan Cabin Inc, Alex Carlucci Senior Vice President of Gustan Cho Associates at Loan Cabin Inc.

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