What Are Mortgage Guidelines Versus Overlays
What Are Mortgage Guidelines Versus Overlays
Many borrowers often get confused on mortgage guidelines versus overlays. The first place home buyers visit to get pre-approved is their local bank. Many home buyers do their own due diligence to see if they qualify for a home loan and 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 because the borrower does not meet mortgage guidelines but because of the bank’s overlays.
What Are Overlays
Most people are not familiar with the mortgage process. It is not often where people buy homes or refinance their mortgages. And when they do, mortgage regulations often change and 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 but that is so far from the truth. There is a big difference between mortgage guidelines versus overlays. Mortgage 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 which are called 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 even though FHA states borrowers can qualify for FHA Loans with 580 credit scores. This is called a lender overlay on credit scores.
- FHA does not require for 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.
- FHA does not require minimum amount of credit tradelines. However, a lender may require 3 credit tradelines that has been seasoned for at least 24 months. This is called overlays on credit tradelines.
- Maximum debt to income ratios 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.
There are many other overlays that lenders may require such as verification of rent, reserves, and some may not allow gift funds to be used for down payment. The good news is that there are many lenders like myself that do not have any lender overlays and just go off the approve/eligible findings of the Automated Underwriting System.
FHA Lender Overlays
FHA Loans is 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 and acts as a mortgage insurer to private lenders who originate and fund FHA Loans in the event if borrowers default on their FHA Loans and goes into foreclosure. FHA promotes home ownership 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 FHA Guidelines and qualify for a FHA Loan but not with the lender they consulted because they may have FHA Lender Overlays. Unfortunately, many loan officers will not explain to borrowers that they may qualify for a FHA Loan and meet the guidelines but do not qualify with that particular lender due to them having FHA Lender Overlays. Over 75% of my borrowers are folks who are told that they do not qualify for a FHA Loan but in fact they meet all FHA Lending Guidelines and do qualify with lenders with no overlays.
FHA Guidelines On Chapter 13 Bankruptcy
One of the most common overlays lenders have is waiting period after Chapter 13 Bankruptcy discharged date. Here is the FHA Requirements with borrowers during and after Chapter 13 Bankruptcy:
- Borrowers can qualify for FHA Loans one year in their Chapter 13 Bankruptcy with the approval of the Trustee and as long as they 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 Chapter 13 Bankruptcy discharged date which is not a FHA Guidelines BUT an overlay on the lender
Collections And Charge Off Accounts
FHA does not require borrowers to pay outstanding collections and charge off accounts to qualify for a FHA Loan. 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 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 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 and do not require them to be satisfied. FHA understands that people can go through periods of hard time and just wants to see that they have re-established credit and have been timely for the past 12 months.
Denied For FHA Loan?
Borrowers who are told that they do not qualify for a FHA Loan or got a last minute loan denial due to FHA Overlays by their lender, please contact The Gustan Cho Team at Nationwide Mortgage & Realty LLC at 262-878-1965 or text Gustan on his cell at 262-716-8151 for faster response. Nationwide Mortgage & Realty LLC has no overlays on all of their conforming loan programs. We are available 7 days a week, evenings, weekends, and holidays.