Mortgage Agency Guidelines Versus Overlays On Home Loans

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Mortgage Agency Guidelines Versus Overlays On Home Loans

This BLOG On Mortgage Agency Guidelines Versus Overlays On Home Loans Was UPDATED On October 2nd, 2018 and Written By Bianca Piverger of Gustan Cho Associates at Loan Cabin Inc.

Many mortgage borrowers ask the question ” What Are Mortgage Agency Guidelines Versus Overlays “.

There are two types of Mortgage Agency Guidelines Versus Overlays .

  • The federal Mortgage Guidelines which are implemented by the various mortgage loan programs such as FHA, VA, USDA, Fannie Mae, and Freddie Mac
  • The agencies sets the minimum mortgage lending requirements for borrowers
  • Borrowers needs to meet the minimum mortgage lending guidelines of each particular mortgage loan program they apply for
  • Every loan program have different Mortgage Guidelines
  • There are Mortgage Guidelines with respect to the following:
    • minimum credit score
    • debt to income ratios
    • outstanding collection accounts
    • waiting periods after a prior bankruptcy and prior foreclosures
    • judgments
    • charge off accounts
    • late payments
    • tax liens
    • co-borrowers
    • non-occupant co-borrowers
    • manual underwriting
    • deferred student loans
    • seasoning requirements to refinance a home loan after a home purchase
    • cash out refinance loan to value limits
    • gaps in employment
    • part time and other income
    • bank statements
    • unreimbursed expenses
    • verification of rent
    • other credit and financial factors of borrowers

Example Of Mortgage Agency Guidelines Versus Overlays On Home Loans

Here is a case scenario on Mortgage Agency Guidelines Versus Overlays:

  • For Example, HUD has mortgage lending guidelines where the minimum credit score required by a borrower needs to be 580 FICO to qualify for a 3.5% down payment FHA home purchase loan
  • FHA allows borrowers with credit scores of under 580 FICO to qualify for a FHA Loan
  • However, HUD Mortgage Guidelines on borrowers who have credit scores under 580 FICO credit scores require that the home buyer put at least 10% down payment
  • Fannie Mae and Freddie Mac have their own Mortgage Guidelines
  • Minimum credit scores to qualify for a Conventional Loan is 620 FICO credit scores
  • FHA Loans and Conventional Loans are the two most popular mortgage loan programs
  • We will discuss Mortgage Guidelines on FHA and Conventional Loans on this article

Typical Mortgage Agency Guidelines Versus Overlays

The second type of Mortgage Guidelines are called mortgage lender overlays:

  •  Lender overlays are mortgage lending guidelines that are imposed by each individual lender on top of the federal minimum mortgage lending guidelines
  • For example, FHA only requires a 580 FICO Credit Score to qualify for a FHA home purchase mortgage loan with 3.5% down payment
  • However, most banks will not accept any Borrowers who do not have at least a 640 FICO Credit Score
  • This is called a lender overlay on credit scores imposed by banks
  • Same with collection accounts
  • FHA does not require borrower to pay off outstanding collection accounts and charge off accounts
  • However, many banks and mortgage companies will require that Borrowers pay off all outstanding collection accounts and all charge offs in order for them to qualify for a FHA Loan with their mortgage lending institution
  • This is called a mortgage lender overlay on collection accounts

Borrowers who meet the minimum FHA or Conventional mortgage lending guidelines and need a mortgage lender with no overlays, contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. We specialize in FHA Loans, VA Loans, USDA Loans, and Conventional Loans with no lender overlays.

FHA Mortgage Agency Guidelines Versus Overlays

FHA Loans are the most popular mortgage loan program in the United States. FHA is part of the United States Department of Housing and Urban Development, often known as HUD by many, and has one of the most lenient mortgage lending guidelines out of all mortgage loan programs. HUD sets FHA Lending Guidelines through it’s HUD 4000.1 FHA Handbook which is a comprehensive 800 plus pages of rules and regulations FHA approved mortgage lenders need to abide and adhere to in order for the FHA Loans they originate and fund to be insurable against borrower’s default. There are too many FHA Mortgage Guidelines to list on this article, however, here are the bullet points of FHA:

  • Minimum Credit Scores 580 FICO to qualify for 3.5% down payment FHA Loan
  • Borrowers with credit scores of under 580 FICO can qualify for FHA Loan
  • However, 10% down payment is required
  • Minimum credit score required to qualify for FHA Loan is 500 FICO Credit Scores
  • Maximum debt to income ratios up to 56.9% DTI if credit scores are higher than 620 FICO
  • Debt to income ratios are below 43% DTI if borrower has credit scores of under 620 FICO
  • Outstanding collection accounts and charge off accounts do not have to be paid off in order to qualify for FHA Loan
  • Non-Occupant Co-Borrowers who are related to borrower by blood, marriage, or law are allowed to be added on the FHA Loan
  • 2 Year Waiting Period After Chapter 7 Bankruptcy Discharged Date To Qualify For FHA Loan
  • Those one year into Chapter 13 Bankruptcy can qualify for FHA Loan
  • No waiting period after Chapter 13 Bankruptcy discharged date
  • Three year waiting period after foreclosure, deed in lieu of foreclosure, and short sale to qualify for FHA Loan
  • Mortgage charge offs with balance reporting on credit report does not matter as long as it has been seasoned for at least three years
  • Charge off balance do not have to be paid off
  • One year waiting period after a loan modification to qualify for FHA Loan
  • 100% gifted funds are allowed for the down payment and up to 6% sellers concessions is allowed by the home seller to the home buyer

Fannie Mae And Freddie Mac Mortgage Guidelines Versus Overlays

Fannie Mae and Freddie Mac are the two mortgage giants in the United States that sets the standards and mortgage guidelines for conventional loans. Mortgage lenders need to follow Fannie Mae and Freddie Mac mortgage lending guidelines if they want to sell the conventional loans they originate and fund to the secondary market so they can relieve their warehouse lines of credit. There are too many Conventional Mortgage Guidelines to list on this article but here are the main Fannie Mae and Freddie Mac mortgage guidelines that most borrowers have questions:

  • Fannie Mae requires minimum 3% down payment on home purchases for first time home buyers
  • Freddie Mac will allow 3% down payment for home buyers who have not had any ownership in a home for at least three years
  • Normally, 5% down payment is required on all Conventional Loans
  • Minimum credit score required to qualify for Conventional Loans is 620 FICO credit scores
  • With conventional loans, mortgage rates depends on credit scores and loan to value
  • The higher the credit score, the lower the mortgage rates
  • The lower the loan to value, the lower the mortgage rates
  • Conventional Loans are not insured by the government like FHA Loans are and any loan to value that is greater than 80% loan to value, private mortgage insurance is required
  • Private mortgage insurance premium will depend on the borrower’s credit scores, loan to value, and property type
  • There is a four year waiting period to qualify for a conventional loan after a Chapter 7 Bankruptcy discharged date
  • There is a two year waiting period to qualify for a Conventional Loan after a Chapter 13 Bankruptcy discharged date
  • There is a four year waiting period to qualify for a conventional loan after a short sale and/or deed in lieu of foreclosure
  • There is a 7 year waiting period to qualify for a conventional loan after a foreclosure

Mortgage Included In Bankruptcy Guidelines

Mortgage part of Bankruptcy:

  • Borrowers with a prior mortgage part of bankruptcy, there is a four year waiting period to qualify for a conventional loan after the discharged date of the Chapter 7 Bankruptcy
  • This holds true even if the recorded foreclosure date is recorded at a later date
  • This is not with FHA Loans
  • With FHA Loans, there is a three year mandatory waiting period to qualify for a FHA Loan from the recorded date of the foreclosure
  • The discharged date of the Chapter 7 Bankruptcy does not matter

Most Lenders Have Overlays

Just because borrowers meet the minimum FHA or Fannie Mae/Freddie Mac mortgage lending guidelines does not mean that all lenders will approve you for a home loan. Gustan Cho Associates at Loan Cabin Inc. is one of the few national lenders that has no overlays.

  • Most lenders have mortgage guidelines of their own that surpass the minimum FHA and Conventional Loan Mortgage Guidelines
  • These additional guidelines are called mortgage lender overlays
  • For example, FHA minimum credit score requirements to qualify for a FHA Loan is 580 FICO
  • However, most banks and many mortgage companies will not approve borrowers who does not have at least a 640 FICO credit score
  • This is called lender overlays on credit scores
  • Same with debt to income ratios
  • FHA allows a maximum of 56.9% debt to income ratios for FHA borrowers with credit scores of at least 620 FICO or higher
  • However, most FHA approved mortgage lenders cap the debt to income ratios to 45% DTI or 50% DTI
  • Another common overlays is outstanding collection accounts
  • FHA does not require that outstanding unpaid collection accounts to be paid off
  • However, most banks and many mortgage companies will require that all outstanding unpaid collection accounts be paid off in full
  • Some even require a two year seasoning after the collection accounts and charge off accounts have been paid off in order for them to approve borrowers

Home buyers looking for a mortgage loan officer that specializes in no lender overlays FHA and Conventional Loans, contact Bianca Piverger at Gustan Cho Associates at 954-732-8217 or text for faster response. Or email us at bianca@loancabin.com. I am available 7 days a week, evenings, weekends, and holidays to take your calls or emails to answer any of your questions.

This BLOG On Mortgage Agency Guidelines Versus Overlays Was UPDATED On October 2nd, 2018

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