What Are FHA Lender Overlays Imposed By Mortgage Companies

This Article Is About What Are FHA Lender Overlays Imposed By Mortgage Companies

FHA Loans are residential mortgage loans that are originated by banks and mortgage companies that meet HUD lending guidelines. FHA Loans is the most common and popular mortgage loan program in the United States. The United States Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA). Many folks have heard of FHA Loans. The Federal Housing Administration (FHA) is a government agency under the umbrella of HUD whose role is to insure FHA Loans originated and funded by private banks and lenders. HUD will insure private Approved Lenders in the event that homeowners with FHA Loans default on their loans and the property go into foreclosure. Due to the government guarantee from HUD, lenders are more than willing to originate FHA loans at competitive rates with only a 3.5% down payment. Lenders need to make sure borrowers meet the minimum agency mortgage guidelines of HUD. However, lenders can have higher lending standards called lender overlays. Not all lenders have the same lending requirements on FHA loans.

What Function Does FHA Play In Lending?

In order for HUD to insure FHA Loans, lenders need to meet FHA Guidelines:

• FHA, Federal Housing Administration, is part of the United States Department of Housing and Urban Development
• FHA is a government entity whose function is to insure and guarantee banks and mortgage companies against loss from FHA borrowers
• In order for HUD, the parent of FHA,  to insure FHA Loans, lenders who originate and fund FHA Loans needs to follow HUD lending guidelines
• If an FHA lender does not follow and abide by HUD lending guidelines, the home loan will not be insurable
• HUD will not insure in the event the borrower defaults on their FHA Loan

What Are FHA Lender Overlays: Overlays are additional lending guidelines that are set by individual lenders that are above and beyond the minimum HUD guidelines.

Minimum FHA Loan Requirements

HUD has minimum FHA Loan Requirements. Borrowers need a 580 FICO credit score to qualify for a 3.5% down payment FHA home purchase loan. Lenders can have FHA Lender Overlays on credit scores where they can require a 640 FICO credit score. This holds true even though the minimum credit score required is 580 FICO per HUD. HUD allows borrowers with credit scores as low as 500 FICO to be eligible for FHA loans. However, borrowers with credit scores under 580 and down to 500 FICO require a 10% down payment per HUD agency guidelines. Many lenders will not touch any borrower with credit scores lower than 580 FICO. It is perfectly legal for lenders to have higher credit score requirements that is higher than HUD agency guidelines. Same with debt to income ratios. Maximum debt to income ratios allowed for FHA Loans with credit scores higher than 620 FICO is 46.9% front end and 56.9% back end. However, lenders can have FHA Lender Overlays that are below the maximum debt to income ratios allowed by FHA. Most banks will not accept mortgage loan applicants with debt to income ratios higher than 45% to 50%. HUD allows mortgage loan applicants with unpaid collection accounts to qualify for FHA loans without having them pay off the collection accounts. However, many lenders will require that they pay off unpaid collection accounts in order for them to get qualified with their lending institution.

What Are FHA Lender Overlays And How Does It Work?

There are two types of FHA lending guidelines.

• One set by HUD
• The second set of guidelines are guidelines which are called FHA Lender Overlays which is set by individual mortgage companies

Most lenders have additional FHA Lender Overlays on top of the minimum FHA lending guidelines. An FHA-approved lender does not have to just go off the FHA minimum mortgage lending guidelines. They must meet the minimum FHA minimum lending requirements. However, they can have higher standards than the minimum lending FHA guidelines. Again, these additional mortgage lending guidelines are called FHA Lender Overlays.

Minimum Credit Tradelines

FHA does not require a minimum amount of credit tradelines for FHA Loan borrowers. However, many lenders have credit tradelines FHA Lender Overlays and will require minimum credit tradelines. Credit tradelines are credit accounts that report to the three credit bureaus with at least a 12-month on-time credit payment history. Some lenders require credit tradelines that have been seasoned 24 months and no late payments in the past 24 months.

Typical FHA Lender Overlays

The common overlays most lenders have are the following:

• Credit Score Overlays
• Credit Score Overlays
• Not all lenders will do Manual Underwriting 
• Overlays On Outstanding Collections and Charge Offs
• Debt To Income Ratio Overlays
• Qualifying For FHA Loans During And After Chapter 13 Bankruptcy
• Minimum Credit Tradelines
• Reserves
• Lenders can have lender overlays where the borrowers cannot accept gift funds unless they have a certain credit score

Mortgage companies can have any type of lender overlays for their financial institution. Most lenders have lender overlays. Gustan Cho Associates has anational reputation for not having any lender overlays on government and conventional loans.

Mortgage Lenders With No FHA Lender Overlays

There are lenders such as Gustan Cho Associates that do not have any FHA Lender Overlays. We just go off the minimum FHA Lending Guidelines set by HUD. If a mortgage loan applicant has an approve/eligible per automated underwriting system, that applicant will close on their FHA Loan as long as they can provide the conditions on the DU FINDINGS.

If you are looking for a mortgage company licensed in multiple states with no lender overlays on government and conventional loans, contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.