Mortgage Guidelines Versus Overlays on Home Loans
In this blog, we will cover and discuss the difference between mortgage guidelines versus overlays on home loans. Many borrowers often get confused about mortgage guidelines versus overlays. The first place home buyers visit to get pre-approved is their local bank. Many homebuyers do their own due diligence to see if they qualify for a home loan. When they see that they meet the minimum lending requirements, they go to their local bank to be told that they do not qualify. The reason that they are told they do not qualify for a mortgage loan by their bank is not that the borrower does not meet mortgage guidelines but because of the bank’s overlays. In this article, we will cover and discuss Mortgage Guidelines Versus Overlays On Home Loans.
What Are Mortgage Overlays?
In this section, we will discuss what is a mortgage overlay on government and conforming loans. Before we jump into what an overlay is, let’s go over what a mortgage overlay is in general terms. Mortgage overlays are lending requirements and mortgage rules that a mortgage company creates and implements above and beyond the minimum mortgage guidelines of HUD, USDA, VA, Fannie Mae, and Freddie Mac. Most people are not familiar with the mortgage process. It is not often that people buy homes or refinance their mortgages. And when they do, mortgage regulations often change. It is not the same as it was the last time borrowers went through the loan process. Many are under the belief that all lenders have the same mortgage requirements. That is so far from the truth.
What Are Agency Guidelines In A Mortgage?
Now since we went over what a mortgage overlay is, let’s cover and discuss what is agency guidelines in a mortgage. The mortgage business is more confusing for borrowers because of all of the technical terms used by loan officers, processors, underwriters, and third-party partners. You will hear the term agency guidelines used throughout the mortgage process. So what is a guideline in a mortgage? There is a big difference between mortgage guidelines versus overlays. Mortgage Agency Guidelines are lending requirements set by FHA, VA, USDA, Fannie Mae, and Freddie Mac. All lenders need to meet the minimum mortgage guidelines. However, lenders have the option to set higher lending requirements. These higher standards are called lender overlays.
Who Sets The Agency Mortgage Guidelines?
Agency guidelines are the minimum set of rules by FHA, VA, USDA, Fannie Mae, and Freddie Mac. You have the agency guidelines by the federal agencies on the minimum lending requirements and you have the mortgage overlays by the independent lender. There are lenders like Gustan Cho Associates with no mortgage overlays on government and conventional loans. Examples of mortgage agency guidelines are minimum credit scores, DTI, collections, charged-off accounts, and hundreds of derogatory credit tradelines. Lenders can have mortgage overlays on each agency guideline set by HUD, VA, USDA, Fannie Mae, and Freddie Mac.
Why Do Lenders Have Overlays?
A real good question often asked by borrowers and even from new loan officers is why do lenders have overlays? The main reason why lenders have mortgage overlays is to reduce the risk of mortgage loan borrowers defaulting on the home loans they originate and fund. All HUD-approved mortgage lenders need to have their borrowers meet the minimum FHA lending guidelines by HUD. However, most lenders will have lender overlays of their own. What are lender overlays? Lender overlays are additional mortgage guidelines that are above and beyond HUD agency guidelines. For example, the minimum credit score requirement to qualify for FHA loans with 500 FICO. 10% down payment is required for borrowers who have credit scores between 500 to 579 FICO.
How Many Mortgage Overlays Does Each Lender Have?
A lender can impose mortgage overlays on just about anything. Common lender’s overlays include credit scores, debt-to-income ratio, collection accounts, charge-off accounts, credit disputes, manual underwriting, gift funds, and derogatory credit tradelines. Now, an FHA overlay is mortgage overlays are one or more sets of lending requirements a mortgage lender imposes above the minimum HUD 4000.1 FHA Handbook mortgage guidelines on FHA loans. In layman’s terms, an FHA overlay is the lender’s own independent set of rules that has higher lending requirements than the published agency guidelines from HUD on FHA loans.
Typical Mortgage Lender Overlays
Here are some examples of what overlays are:
- There are minimum credit guidelines for FHA of 580 FICO to qualify for a 3.5% down payment home purchase loan
- However, lenders can require 640 FICO requirements
- This holds true even though HUD states borrowers can qualify for FHA Loans with 580 credit scores
This is called a lender overlay on credit scores.
Overlays on Outstanding Collections and Charged-Off Accounts
HUD does not require borrowers to pay off outstanding collections and charge off accounts to qualify for FHA loans. However, a bank or lender can require that all collections and charge-offs be paid by the borrower. This is called overlays on collections and charge-off accounts. HUD does not require a minimum amount of credit tradelines. However, a lender may require 3 credit tradelines that have been seasoned for at least 24 months. These is called overlays on credit tradelines. The maximum debt-to-income ratio allowed on debt-to-income ratios with FHA Loans is 56.9% if the borrower has credit scores higher than 620. However, lenders can require DTI caps of not higher than 45%. This is called overlays on debt to income ratios.
What Is a No Overlay Lender?
Now since we have covered agency guidelines and mortgage overlays, the next frequently asked question we need to cover is what is a no overlay lender? As mentioned in earlier sections, mortgage overlays are additional mortgage guidelines and conditions required by individual lenders that are above the minimum agency guidelines. A no overlay lender is a mortgage lender just like Gustan Cho Associates. Gustan Cho Associates is a no overlay lender. We do not have any mortgage overlays on government-backed and conventional loans. A no mortgage overlays lender will just go off the agency minimum guidelines and not have another set of mortgage rules when it can cause a loan denial who meets the agency guidelines. There are many other overlays that lenders may require such as verification of rent, and reserves. Some lenders may not allow gift funds to be used for the down payment. The good news is that there are many lenders like myself that do not have any lender overlays. We just go off the approve/eligible findings of the Automated Underwriting System.
Is It Legal For Lenders To Deny Homebuyers Who Meet Agency Guidelines?
Federal agency guidelines on government loans and Fannie Mae/Freddie Mac on conventional loans lay out the minimum set of rules and lending requirements for their minimum mortgage programs. However, each independent mortgage lender is allowed and can impose and implement higher lending requirements of their own known as lender overlays (also called mortgage lender overlays, overlays, mortgage overlays, FHA overlays, VA overlays, USDA overlays, and Conventional loan overlays).
Mortgage Guidelines Versus Overlays on FHA Loans
FHA loans are one of the most popular loan programs in the United States. FHA is not a lender and has nothing to do with funding FHA loans. FHA is part of the United States Department of Housing and Urban Development. FHA acts as a mortgage insurer to private lenders who originate and fund FHA Loans in the event that borrowers default on their FHA Loans and go into foreclosure. FHA promotes homeownership for first-time home buyers and borrowers who had prior credit issues or higher debt-to-income ratios. Borrowers who consult with banks or other lenders and are told that they do not qualify for FHA Loans may meet HUD Guidelines and qualify for an FHA Loan but not with the lender they consulted. This is because they may have FHA Lender Overlays. Unfortunately, many loan officers will not explain to borrowers that they may qualify for an FHA loan and that borrowers meet the guidelines. But do not qualify with that particular lender due to them having FHA Lender Overlays. Over 75% of our borrowers are folks who are told that they do not qualify for an FHA Loan. But in fact, they meet all FHA Lending Guidelines and do qualify with lenders with no overlays.
Mortgage Guidelines Versus Overlays on Chapter 13 Bankruptcy
One of the most common overlays lenders have is the waiting period after the Chapter 13 Bankruptcy discharge date. Here are the FHA Requirements with borrowers during and after Chapter 13 Bankruptcy. Borrowers can qualify for FHA loans one year after their Chapter 13 Bankruptcy. Need approval of the Trustee. Need to have made 12 timely payments to their creditors. There is no waiting period after Chapter 13 discharged date. Most lenders will require a one-year or two-year waiting period after the Chapter 13 Bankruptcy discharged date which is not an FHA Guidelines BUT an overlay on the lender.
Mortgage Guidelines Versus Overlays on Collections and Charge Off Accounts
HUD does not require borrowers to pay outstanding collections and charge off accounts to qualify for FHA loans. Unfortunately, most lenders will require borrowers to pay outstanding collections and charge off accounts. Paying off an outstanding collection and/or charge off can drop credit scores. This is because it re-activates the date of last activity. Borrowers who are told that they do not qualify for FHA Loans unless they pay off the outstanding collection and/or charge off accounts, go to a different lender that has no overlays. HUD does not care about older collections and charge off accounts. They do not require them to be satisfied. FHA understands that people can go through periods of a hard time and just wants to see that they have re-established credit and have been timely for the past 12 months.
Getting Pre-Approved After Being Denied For a Mortgage
Borrowers who are told that they do not qualify for an FHA Loan or got a last-minute loan denial due to FHA Overlays by their lender, please contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Or email us at [email protected] Gustan Cho Associates has no overlays on all of its conforming loan programs. We are available 7 days a week, evenings, weekends, and holidays.
This BLOG On Mortgage Guidelines Versus Overlays Was UPDATED on June 26th, 2022