Overlays On Credit Scores By Lenders Versus Agency Guidelines

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Overlays On Credit Scores By Lenders Versus Agency Guidelines

This BLOG On Overlays On Credit Scores By Lenders Versus Agency Guidelines Was PUBLISHED On July 18th, 2019

Overlays On Credit Scores By Lenders Versus Agency Guidelines

Lenders With Overlays On Credit Scores:

Overlays On Credit Scores are higher credit score requirements imposed by individual lenders that are higher than those imposed by FHA, VA, USDA, Fannie Mae, and Freddie Mac.

  • Every mortgage loan program has minimum credit score requirements
  • Two of the most popular mortgage loan programs in the United States today is FHA Loans and Conventional Loans
  • We will be covering FHA and Conventional Loans on this article
  • FHA Guidelines On Credit Score Requirements to qualify for an FHA loan on a home purchase with 3.5% down payment is 580 credit scores
  • However, overlays on credit scores do exist by most mortgage lenders

In this article, we will cover and discuss Overlays On Credit Scores By Lenders Versus Agency Guidelines.

Typical Common Overlays By Mortgage Lenders

Typical Common Overlays By Mortgage Lenders

Most banks have overlays on credit scores where they will require a minimum credit score requirement of 640 FICO credit scores for all FHA mortgage loan borrowers:

  • This holds true even though HUD only requires a minimum credit score requirement of 580 FICO credit scores to qualify for a 3.5% down payment home purchase FHA loan
  • HUD also permits for Borrowers with credit scores under 580 credit scores to qualify for FHA Loans
  • However, HUD will require 10% down payment for all Borrowers with credit scores under 580 credit scores
  • Most lenders with overlays on credit scores will not approve, originate, and fund FHA Loans for borrowers with credit scores under 580 FICO credit scores even though HUD allows it

Borrowers with credit scores down to 500 credit scores can qualify for FHA Loans under HUD Guidelines. Again, most Lenders will not want to touch anyone with such low credit scores. This holds true even though HUD will insure the FHA Loans.

Fannie Mae Guidelines On Credit Scores On Conventional Loans

Fannie Mae Guidelines On Credit Scores On Conventional Loans

Minimum credit score requirements for Conventional Loans is 620 FICO credit scores.

  • Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set the standards for Conventional Loans
  • Home Buyers of second homes and investment properties need to go with Conventional Loans
  • This is because FHA, VA, and USDA are only for owner occupant primary residential properties
  • Government Loans are not for a second home or investment properties
  • Lenders do have overlays on credit scores on Conventional Loans

Most may require a credit score of 680 FICO. This holds true even though Fannie Mae and Freddie Mac only requires a 620 FICO minimum credit score requirement.

Importance Of Credit Scores

Importance Of Credit Scores

Credit Scores is one of the most important factors that determine mortgage rates for mortgage borrowers.

  • However, the importance of credit scores plays more of an impact on the mortgage qualification process than just determining mortgage interest rates, especially with FHA Loans
  • Credit Scores are deciding factors on debt to income ratio qualification requirements
  • FHA Guidelines On Debt To Income Ratios will allow debt to income ratios up to 56.9% DTI for borrowers with credit scores of 620 or higher
  • However, if your credit scores fall below 620 credit scores, then HUD requires that the maximum debt to income ratios allowed for Borrowers cannot exceed 43% DTI

Lenders who have overlays on credit scores may require that any Borrowers with credit scores under 640 credit scores have verification of rent.

Typical Lender Overlays 

Typical Lender Overlays 

Many lenders who require Borrower with credit scores of under 640 FICO, rental verification is required as part of their lender overlays:

  • Rental Verification is only valid when a renter can provide the mortgage lender 12 months of canceled checks that he or she has paid to their landlord and cannot be late
  • Paying cash for rental payments and getting a paid cash receipt by the landlord will not be valid for verification of rent purposes
  • However, if the renter has been renting from a property management company that is a registered property management company, the property management property manager can complete the verification of rent form provided by the lender

The VOR can be used in lieu of providing 12 months canceled the check and/or 12 months bank statements.

Verification Of Rent Guidelines And Requirements

Verification Of Rent Guidelines And Requirements

Overlays on credit scores like lenders requiring verification of rent if their credit scores are under 640 credit scores create a major problem for homebuyers who cannot provide verification of rent:

  • This is because they have been living rent-free with a family trying to save up money for the down payment of their home purchase
  • The great news is that if you are a home buyer with under 640 credit scores, you just need to look for a lender like Gustan Cho Associates who has no overlays on credit scores
  • We also have no other overlays on FHA Loans

Automated Underwriting System Findings

Automated Underwriting System Findings

Another major factor with credit scores is that many times, the Automated Underwriting System will require verification of rent for Borrowers with credit scores of under 620 FICO.

  • This creates major problems for homebuyers who cannot provide verification of rent due to not making their rental payments with a check or homebuyers who cannot provide rental verification
  • This is because they do not rent and were living rent-free with family, relatives, or friends
  • When a borrower with under 620 credit scores is required to provide verification of rent by the automated findings, the loan officer can help the Borrower to boost their credit scores to 620 FICO or higher
  • There are several tricks of the trade helping a borrower to boost up their credit scores
  • Examples include paying down tradelines such as paying down their credit card balances
  • Or adding themselves as an authorized user to a credit card of a family member who has credit cards with perfect payment history and low credit card balances
  • Or by improving their credit scores by getting several secured credit cards

If you are a mortgage loan borrower and need a mortgage lender with no lender overlays, please contact me at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. The Team at Gustan Cho Associates Mortgage Group are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

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