Underwriting Credit Guidelines During Mortgage Process

Underwriting Credit Guidelines During Mortgage Process

This BLOG On Underwriting Credit Guidelines During Mortgage Process Was UPDATED On January 5th, 2019

Mortgage Borrowers should not stress during the mortgage process.

  • There is no reason for any pre-approvals to get a last minute mortgage denial
  • The main reason for a last minute mortgage loan denial or stress during the mortgage process is due to the borrower not being properly qualified by the loan officer
  • As long as the borrower can been properly qualified and pre-approved, all mortgage loans should close 100%
  • There should not be any stress during mortgage process

Mortgage Loan Originators need to follow two important Underwriting Credit Guidelines:

  1. Federal Minimum Underwriting Credit Guidelines
  2. Lender Underwriting Credit Guidelines also known as overlays

Federal Minimum Underwriting Guidelines

Credit / Underwriting guidelines in mortgage application process:

Federal Minimum Underwriting Credit Guidelines are the minimum mortgage guidelines set by the specific mortgage programs.

  • There are government loans and conventional loans
  • Government Loans are owner occupant mortgage loan programs that is guaranteed by a government agency

Government Loan Programs

Here are the three government loan programs:

  1. HUD, the parent of FHA, insures and guarantees all FHA Loans to lenders who originate and fund FHA Loans 
  2. The United States of Veteran Affairs (VA) insures all VA Loans that is originated and funded by VA Approved private banks and lender
  3. Department of Agriculture is the federal agency that insures and guarantees against loss on all USDA Loans

In order for the government agency to guarantee government loans, the financial institution needs to follow their minimum federal Underwriting Credit Guidelines.

Conventional Loans

  • Conventional Loans are not guaranteed by any government agency
  • Any conventional loans with less than 20% equity requires private mortgage insurance
  • Any conventional loans that is originated by banks and private lenders need to conform to Fannie Mae and/or Freddie Mac Underwriting Credit Guidelines in order for Fannie/Freddie to purchase these loans on the secondary market

Credit Report and Credit Scores

All government loan programs and conventional loans have minimum credit score minimum requirements.

  • Just because a borrower meets the minimum credit score requirements does not automatically qualify them for a loan program The Automated Underwriting System will thoroughly review and analyze each borrowers’s credit reports
  • A tri-merge credit report is required on all mortgage loan programs

Tri-Merger Mortgage Credit Reports

A tri-merge credit report is credit reports from all three major credit bureaus:

For FHA and VA Streamline Refinance Mortgage transactions, it is used solely to validate the credit score.

Credit Scores Used By Lenders

The middle credit score of borrowers are used by lenders:

  • If there are multiple borrowers, whether they are co-borrowers or non-occupant co-borrowers, then the lowest borrower’s middle credit scores is the credit scores used for qualification purposes
  • If a borrower has three credit scores and two out of the three credit scores are the lower scores, that lower duplicate credit scores is used for qualification purposes by underwriters
  • If a borrower has only one credit score, then that score is used to qualify by mortgage underwriters

Mortgage Lender Overlays

As mentioned, there are two types of underwriting credit guidelines:

  • Federal Minimum Underwriting Credit Guidelines 
  • Lender Overlays

The Gustan Cho Team at Loan Cabin Inc. has no lender overlays on government and conventional loans. So Lender Overlays are not an issue with our borrowers. However, most lenders have overlays. What overlays are are additional mortgage guidelines that is above and beyond those of federal minimum underwriting credit guidelines.

Here are typical mortgage lending overlays:

  • HUD, the parent of FHA, requires a minimum credit score of 580 to qualify for FHA Loans with 3.5% down payment on home purchases
  • A lender can require higher than 580 credit scores such as requiring 620 or 640 for a 3.5% down payment FHA home purchase loan
  • On the above example, the lender has overlays on credit scores
  • Another example is that most lenders have FHA DTI Overlays where they require a maximum of 45% to 50% debt to income ratio caps
  • However, under HUD Guidelines, a borrower can get an approve/eligible per Automated Underwriting System with a front end debt to income ratio of 46.9% and back end debt to income ratio of 56.9%
  • Another example is that HUD does not require borrowers to pay off outstanding collections and/or charge off accounts to qualify for FHA Loans no matter how much the outstanding balance is
  • However, most lenders have overlays on collections and charge off accounts where they require them to have it paid off and/or a cap on the maximum outstanding balance they can have even though HUD does not require it
  • Most Lenders require a minimum 620 credit scores on VA Loans
  • However, VA does not have any credit score requirements on VA Loans 
  • Most VA Lenders have debt to income ratio requirements on VA Loans such as a cap of 41% to 50% DTI
  • However, VA does not have any debt to income ratio requirements on VA Loans

The Gustan Cho Team at Loan Cabin Inc. is a full service direct lender with no overlays on government and/or conventional loans. Borrowers who need a five star direct lender with no overlays can contact us at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays. We are proud to say that we close 100% of all of our pre-approvals and have zero mortgage lender overlays. We just go off automated findings.

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