This BLOG On Mortgage Denial Due To Overlays And Choosing No Overlay Lenders Was PUBLISHED On February 6th, 2020
Over 75% of our borrowers at Gustan Cho Associates are folks who have been either denied or are stressing during the mortgage process.
- There is no reason why borrowers should get a mortgage denial after they have been issued a pre-approval
- Mortgage Denial Due To Overlays is when borrowers meet agency guidelines but do not meet the particular lender overlays
- Gustan Cho Associates is one of the very few national lenders with zero overlays on government and conventional loans
In this article, we will discuss and cover Mortgage Denial Due To Overlays And Choosing No Overlay Lenders.
What Are Lender Overlays And Reasons For Mortgage Denial Due To Overlays
There are two types of mortgage lending guidelines:
- Agency Guidelines
- Lender Overlays
If borrowers want to qualify for FHA, VA, USDA, Conventional Loans, they all need to meet agency guidelines.
- However, each lender can have additional lending requirements on top of agency guidelines
- This additional lending guidelines required by each individual lender is what is called a lender overlay
- Let’s take FHA Loans as an example since FHA Mortgages are the most popular loan program today for home buyers with bad credit
HUD is the parent of FHA. FHA has its own mortgage guidelines.
Basic HUD Guidelines
Here are the basic FHA Guidelines:
- 580 Credit Scores
- 46.9% front end and 56.9% back end debt to income ratios
- Outstanding Collections and Charged Off Accounts do not have to be paid to qualify for FHA Loans
- 100% gifted funds allowed for the down payment and closing costs
Common Lender Overlays By Mortgage Companies
Here are typical lender overlays by lenders:
- Even though FHA requires 580 credit scores, lenders can require 640 as an overlay
- Lenders can have overlays on DTI where they cap it at 45%
- Lenders can require collections and charged off account to be paid even though FHA does not require it
- Lenders can not allow gift funds for down payment even though HUD allows it
Qualifying For Home Loan With Bad Credit
There is one and only reason why borrowers get a last-minute mortgage denial and/or stress during the mortgage process.
- It is because loan officers issued a pre-approval letter without properly qualifying borrowers. Borrowers may meet agency guidelines but may not meet the lender overlays
- Great news with us is that Gustan Cho Associates Mortgage Group has no overlays on government and conventional loans
- As long as borrowers get an approve/eligible per automated underwriting system findings and can meet the conditions of AUS, they will close their loans
- Not only will they close, but they will close it on time
Check out our hundreds of satisfied borrowers on the main search engines.
Choosing A Lender With No Overlays To Avoid Mortgage Denial Due To Overlays
Borrowers with bad credit should consult with a direct lender with no overlays like Gustan Cho Associates:
- It’s just that big banks have these things called overlays
- Overlays are protections that banks put in to protect them in potential foreclosures
- FHA, VA, USDA, Fannie Mae, and Freddie Mac have guidelines
- We only follow these agency guidelines where big banks have overlays
- An example of an overlay is DTI
- DTI stands for debt to income ratio
- That is your monthly debt divided by your monthly income
- Most banks cap borrowers between 45% to 50% DTI where FHA will go to 56.9%
- This is a perfect example of an overlay
- We go to 56.9% honoring FHA guidelines to the tee
- Another example of an overlay that has gotten you denied somewhere else is the credit score
- Borrowers may have a 590 credit score and someone tells you they cannot help you
Well if the computer approves you we can do it.
What If Automated Underwriting System Renders Refer/Eligible
If the automated underwriting system does not approve borrowers but gives us a REFER ELIGIBLE we can do a manual underwrite. Manual Underwriting is permitted with VA and FHA Loans:
- Manual underwriting is very rare in the industry but VA and FHA accepts this
- A big percentage of our VA and FHA Loans are manual underwrites
- Manual underwriting guidelines are very unique and I recommend you call us for details
- Another loan we do that most lenders won’t are Chapter 13 Bankruptcy loans
- These are automatic manual underwrites if Chapter 13 Bankruptcy discharged date has not been seasoned two years
- Home buyers can qualify for VA and/or FHA Mortgage during Chapter 13 Bankruptcy Repayment Plan
- Borrowers need to be in the bankruptcy for 1 year
- Chapter 13 Bankruptcy does not have to be discharged
- Need to be on time with bankruptcy payments to Trustee
So don’t feel down if you gotten denied from a lender. Give us a call at Gustan Cho Associates Mortgage Group.