Overlays In Underwriting On Government And Conventional Loans
This Article Is About Overlays In Underwriting On Government And Conventional Loans
The mortgage industry went through a major overhaul after the subprime crisis. Mortgage companies have two different types of guidelines. Lenders need to meet the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mae. Lenders not meeting the minimum agency guidelines on government loans cannot have the FHA, VA, USDA loans insured by the government agency in the event if the borrower defaults and/or forecloses on their loan. HUD, VA, USDA will only partially guarantee the loss of the lender due to borrower default only if the borrower meets the agency guidelines. Fannie Mae and Freddie Mac will not purchase loans if borrowers do meet the agency guidelines. Conventional loans not meeting Fannie Mae and/or Freddie Mac’s minimum agency mortgage guidelines will not be purchased by Fannie and/or Freddie on the secondary market. Most lenders implement their own lender overlays. Lender overlay is higher lender requirements that are above and beyond the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, Freddie Mac. No Overlays In Underwriting is offered by only a few lenders. There was a time when borrowers use to be able to get any type of loan at their neighborhood bank. They used to be able to get credit cards, car loans, bridge loans, and mortgage loans. Mortgage bankers use their warehouse line of credit to originate and fund government and conventional loans. Lenders need to sell the loans they fund so they can pay down their warehouse line of credit in order to be able to originate more loans. This is how the mortgage lending process works.
Types Of Mortgage Lenders
Prior to the 2008 financial crisis, lenders had very lenient lending requirements. If anyone needed a home loan, all they had to do was visit the local community bank. Income docs were not required. Lenders had no-doc home loans and/or state income loans. These types of loans require no income documentation and all the borrower needs to do is just state their income. Most small community banks either went out of business due to the financial disaster of 2008. Or have been bought out by larger giant banks like JP Morgan Chase, Bank of America, Citibank, or Wells Fargo.
Most American consumers are now noticing that their banks do not have any sense of loyalty:
- This is even though they park their money via checking and savings account
- Although many banks have residential mortgage departments, the bank’s customers more often than not get denied mortgage loans
Lenders need to follow the minimum agency mortgage guidelines on government and conventional loans. Lenders can also have additional lending requirements called lender overlays. Homebuyers can qualify for a home mortgage at banks, credit unions, mortgage bankers, or mortgage brokers. Each one of those lending institutions can have different lending requirements on FHA, VA, USDA, and conventional loans. We will discuss agency mortgage guidelines versus lender overlays in this article.
Qualifying For Mortgage With Lenders That Have Overlays In Underwriting
Most banks and mortgage companies have overlays in underwriting. Just because mortgage applicants meet FHA, VA, USDA, Fannie Mae, and/or Freddie Mac Agency Guidelines does not mean that they will qualify with all lenders. If the loan applicant does not fit the mortgage underwriting guidelines of a particular lender, they will not qualify with that lender. Just because a borrower does not qualify with one lender does not mean that they will not qualify with a different lender. For example, most mortgage companies will not lend to borrowers who have a credit score under 640 FICO. However, many lenders like myself will go down to 580 FICO on 3.5% down payment FHA Loans. Many lenders have overlays on credit scores with a minimum of 620 to 640 FICO score requirements although HUD requires a 580 FICO. HUD allows borrowers under 580 FICO to qualify for FHA Loans but with a 10% down payment.
Mortgage Denials By Banks Due To Overlays In Underwriting
There is hope for mortgage applicants who get denied a mortgage loan by banks. Most banks and mortgage lenders have overlays in underwriting. Overlays are additional mortgage requirements and standards imposed by the individual lenders that are beyond those of the minimum mortgage guidelines. Lenders need to make sure their borrowers meet the minimum agency guidelines on government and conventional loans. However, lenders can have lender overlays. Most lenders have lender overlays. Gustan Cho Associates is one of the few mortgage companies with no lender overlays on government and conventional loans.
Common Overlays In Underwriting Imposed By Lenders
Here are examples of overlays in underwriting:
- HUD requires a minimum of 580 FICO credit score to qualify for FHA Loans with a 3.5% down payment
- Lenders may have overlays in underwriting where they may require a 620 credit score
- This holds true even though HUD only requires 580
HUD does not require that borrowers pay off outstanding collections and charge off accounts to qualify for FHA Loans.
Agency Guidelines Versus Lender Overlays
Banks and other mortgage companies may require that borrowers pay off outstanding collections and charge offs to qualify for FHA Loans:
- This holds true even though HUD, the parent of FHA, does not require it
This is called overlays in underwriting:
- Other typical overlays are a debt to income ratio overlays
- HUD allows up to a front end DTI of 46.9% and back end DTI of 56.9% to get an approve/eligible per Automated Underwriting System findings for borrowers with at least a 620 FICO
- However, many banks and lenders will have a debt to income ratio overlays that cap DTI at 45% to 50% due to their overlays in underwriting
- Borrowers who do not qualify with one lender does not mean that they cannot qualify with a different lender
Borrowers who have bad credit, lower credit scores, higher debt to income ratios, and late payments after bankruptcy and/or foreclosure can contact Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] Gustan Cho Associates is a mortgage company licensed in multiple states with no overlays on government and conventional loans. The team at Gustan Cho Associates are experts in originating mortgages with no overlays in underwriting and are available 7 days a week, evenings, weekends, and holidays.