Overlays With FHA Loans Versus Mortgage Agency Guidelines

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Overlays With FHA Loans Versus Mortgage Agency Guidelines

This BLOG On Overlays With FHA Loans Versus Mortgage Agency Guidelines Was UPDATED On November 20th, 2018

FHA Loans is the most popular home loan program in the United States.

  • The U.S. Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA)
  • FHA is not a lender
  • FHA is a government agency that insures FHA Loans originated by lenders in the event borrowers default on their FHA Loans and the lender takes a loss
  • FHA Loans are loans that is insured by the Federal Housing Administration
  • The Federal Housing Administration will insure lenders against defaults if they are a FHA approved lender and follow FHA guidelines

FHA Loans Are The Most Popular Loan Program In The United States

FHA Loans are an extremely popular mortgage loan vehicle for first time home buyers, for those with prior bad credit. FHA has lenient guidelines for consumers who have filed a bankruptcy and/or had a foreclosure in the past with prior bad credit, low credit scores, and high debt to income ratios.

  • FHA allows borrowers with unpaid collections, charge offs, judgments, and tax liens to be able to qualify for a home loan with 3.5% down payment
    • Minimum credit score of 580 FICO
    • Under 580 scores requires 10% down payment
  • HUD allows for a mortgage loan applicant to add non-occupant co-borrowers in order to meet minimum income qualification requirements
  • Front end 46.9% and back end 56.9% debt to income ratios for approve/eligible per AUS FINDINGS on borrowers with 620 credit scores higher
  • Borrowers with credit scores under 580 FICO can qualify for FHA Loans with automated underwriting system approval with 10% down payment

Basic FHA Guidelines

There are hundreds, if not thousands, of FHA guidelines and sub-guidelines.  However, we will concentrate on the main FHA mortgage lending guidelines for FHA Loans.

Some of the basic FHA guidelines are the following:

  • Minimum 3.5% down payment on real estate purchase transactions
  • Mandatory upfront mortgage insurance premium of 1.75% of the loan amount
  • Annual mortgage insurance premium of 0.85%% of the mortgage loan balance amount for the life of a 30 year fixed rate FHA loan
  • Maximum debt to income ratio of 46.9%/56.9% with borrowers with over 620 credit scores
  • Minimum credit scores of 500 FICO
  • 10% down payment required for those with credit scores between 500 and 579 FICO
  • 3.5% down payment for credit scores of over 580 FICO
  • Mandatory 3 year waiting period after the recorded date of a foreclosure and/or deed in lieu
  • Mandatory 3 year waiting period after a short sale to qualify for a residential FHA mortgage loan
  • Mandatory 2 year waiting period after the discharge date of a personal Chapter 7 bankruptcy
  • No waiting period after Chapter 13 Bankruptcy discharged date to qualify for FHA Loans with The Gustan Cho Team at Loan Cabin Inc.
  • Borrowers can qualify for FHA Loans one year into a Chapter 13 Bankruptcy repayment plan
    • Need approval of Chapter 13 Bankruptcy Trustee
  • Open collections and charge offs okay

Mortgage Lender Overlays With FHA Loans

Just because you have an Approved Eligible from Fannie Mae’s Automated Underwriting System for a FHA mortgage loan does not guarantee that you will get a mortgage approval from a FHA mortgage lender.

  • Many lenders have mortgage underwriting overlay With FHA Loans
  • An overlay is an extra or additional lending requirements above and beyond that those of FHA underwriting guidelines set by each individual lender
  • For example, just because the minimum credit score to qualify for FHA Loans is 580 FICO does not guarantee mortgage approvals
  • Many lenders have credit score overlays on FHA Loans
  • Majority lenders require credit scores of 620 or higher
  • This holds true even though FHA only requires 580
  • And some even have overlays of credit scores of 640 FICO or higher
  • Gustan Cho Associates at Loan Cabin Inc. has no overlays with FHA Loans

Overlays With FHA Loans On Debt To Income Ratios

Other overlays with FHA Loans that mortgage lender might have is lower debt to income ratios.

  • Although FHA guidelines on front end debt to income ratio is 46.9% and back end debt to income ratios are 56.9%
  • Many mortgage lenders have overlays on DTI.
  • Most lenders will cap 45% or 50% on debt to income ratios
  • A lot of lenders will also cap front end DTI to 31%
  • Front end DTI is the housing ratio (P.I.T.I.)
  • Some lenders have overlays that require that borrowers have no late payments whatsoever after a bankruptcy or foreclosure
  • Late Payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale are not HUD Guidelines but rather overlays with FHA Loans by individual lenders
  • Other lenders have overlays with FHA Loans that require a minimum number of credit trade lines or more for at least a year
  • Some lenders may have overlays where they require a minimum of one year rental verification even though AUS does not condition for it

Home buyers looking to get qualified for FHA Loans with a direct lender with no overlays with FHA Loans and have any questions on any loan program,  please contact Gustan Cho Associates at 262-716-8151 or text for faster response. Or email us at gcho@gustancho.com.  Our viewers can also subscribe to our daily mortgage and real estate newsletter at  www.gustancho.com .

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