This blog 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 must 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 FHA, VA, and USDA loans insured by the government agency. HUD, VA, and USDA only insure lenders if a borrower defaults and forecloses on a government loan that meets their agency guidelines. In the following paragraphs, we will cover overlays in underwriting by mortgage lenders.
What Are The Types of Mortgage Loan Programs?
Three types of government-backed loans exist: FHA, VA, and USDA. HUD is the parent of FHA. The Veterans Affairs administers VA loans. The United States Department of Agriculture Rural Development is the federal agency that administers USDA loans. If a homeowner default on government loans, HUD, VA, and USDA guarantees lenders by covering the loss from the defaulted government-backed mortgage loan. This only holds true if the mortgage loan meets the agency mortgage guidelines. Conventional loans are not government-backed loans.
The Role of Fannie Mae and Freddie Mac
The role of Fannie Mae and Freddie Mac is to keep market stability in the housing markets by purchasing mortgage loans, so there is liquidity in the mortgage markets. Fannie Mae and Freddie Mac will not purchase loans if borrowers meet agency guidelines.
Conventional loans not meeting Fannie Mae and Freddie Mac’s minimum agency mortgage guidelines will not be purchased by Fannie and Freddie on the secondary market.
Most lenders implement their own lender overlays. No two mortgage lenders have the exact same lender overlays. One lender can have a lender overlay on gift funds, whereas a different lender will not. One lender may require a credit score on an FHA loan while a different lender may have a 580 minimum credit score requirement.
What Are Overlays in Underwriting By Mortgage Lenders?
Lender overlay is higher lender requirements above and beyond the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac. Only a few lenders offer no Overlays In Underwriting. There was a time when borrowers used to be able to get any 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 the government and conventional loans. Lenders need to sell the loans they fund so they can pay down their warehouse line of credit to originate more loans. This is how the mortgage lending process works. Click here to find a mortgage lender
Types of Mortgage Lenders
Before the 2008 financial crisis, lenders had very lenient lending requirements. Anyone needing a home loan had to visit the local community bank. Income docs were not required. Lenders had no-doc home loans and state-income loans. These types of loans require no income documentation; all the borrower needs to do is 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 accounts. Although many banks have residential mortgage departments, the bank’s customers, more often than not, get denied mortgage loans.
Mortgage Agency Guidelines on Government and Conventional Loans
Lenders must 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 Freddie Mac Agency Guidelines does not mean 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 they will not qualify with a different lender. For example, most mortgage companies will not lend to borrowers with a credit score under 640 FICO.
What Is The Minimum Credit Score Requirement on FHA Loans?
Gustan Cho Associates will originate and fund FHA loans with credit scores down to 500 FICO with a 10% down payment. To qualify for a 3.5% down payment FHA loan, the borrower needs a 580 credit score. 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. Apply for FHA loans under 580 FICO
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 individual lenders impose beyond the minimum mortgage guidelines. Lenders must ensure 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 approved/eligible per Automated Underwriting System findings for borrowers with at least a 620 FICO.
Best Mortgage Lenders For Bad Credit With No Overlays
Many banks and lenders will have 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 do not mean they cannot qualify with a different lender. Borrowers with bad credit, lower credit scores, higher debt-to-income ratios, and late payments after bankruptcy and foreclosure can contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. 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 underwriting overlaps and are available seven days a week, evenings, weekends, and holidays.
