Overlays On Credit Scores Explained


What Are Overlays On Credit Scores?

Lenders With Overlays On Credit Scores

Overlays On Credit Scores are higher credit score requirements imposed by individual mortgage lenders that is higher than those imposed by FHA, VA, USDA, Fannie Mae, and Freddie Mac. Every mortgage loan program have minimum credit score requirements. Two of the most popular mortgage loan programs in the United States today is FHA Loans and Conventional Loans so we will be covering FHA Loans and Conventional Loans on this article. FHA Guidelines On Credit Score Requirements to qualify for a FHA insured mortgage loan on a home purchase with 3.5% down payment is 580 FICO credit scores. However, overlays on credit scores does exist by most 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 even though FHA only requires a minimum credit score requirement of 580 FICO credit scores to qualify for a 3.5% down payment home purchase FHA insured home loan. FHA also permits for FHA Borrowers with credit scores under 580 FICO credit scores to qualify for FHA Loans, however, FHA will require 10% down payment for all FHA Borrowers with credit scores under 580 FICO credit scores. Most FHA Approved mortgage 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 FHA allows it. Borrowers with credit scores down to 500 FICO credit scores can qualify for FHA Loans under FHA Guidelines but again, most FHA Mortgage Lenders will not want to touch anyone with such low credit scores even though FHA will insure the FHA 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 sets the standards for Conventional Loans. Home Buyers of second homes and investment properties need to go with Conventional Loans because FHA, VA, and USDA are only for owner occupant primary residential properties and not for second home or investment properties. Conventional mortgage lenders do have overlays on credit scores on Conventional Loans. Most may require a credit score of 680 FICO even though Fannie Mae and Freddie Mac only requires a 620 FICO minimum credit score requirement.

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 in 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 FHA mortgage borrowers with credit scores of 620 FICO or higher. However, if your credit scores fall below 620 FICO credit scores, then FHA requires that the maximum debt to income ratios allowed for FHA Borrowers cannot exceed 43% DTI.  FHA approved mortgage lenders who have overlays on credit scores may require that any FHA Borrowers with credit scores under 640 FICO credit scores have verification of rent. I know of many FHA Lenders who require that if a FHA Borrower has credit scores of under 640 FICO, rental verification is required. 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 mortgage lender and the VOR can be used in lieu of providing 12 months canceled check and/or 12 months bank statements. Overlays on credit scores like lenders requiring verification of rent if their credit scores are under 640 FICO credit scores creates a major problem for home buyers who cannot provide verification of rent because they have been living rent free with 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 FICO credit scores, you just need to look for a mortgage lender like myself who has no overlays on credit scores and no other lender overlays on FHA Loans.

Another major factor with credit scores is that many times, the Automated Underwriting System will require verification of rent for FHA Borrowers with credit scores of under 620 FICO. This creates a major problems for home buyers who cannot provide verification of rent due to not making their rental payments with a check or home buyers who cannot provide rental verification because they do not rent and were living rent free with family, relatives, or friends. When a borrower with under 620 FICO credit scores is required to provide verification of rent by the automated findings, then the mortgage loan officer can help the FHA Borrower to boost their credit scores to 620 FICO or higher. There are several tricks of the trade in helping a borrower to boost up their credit scores such as paying down their credit card balances, adding themselves as 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 mortgage lender overlays, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I am available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

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