This guide covers what are FHA lender overlays imposed by mortgage lenders. FHA loans are government-backed residential mortgage loans that are originated by banks and mortgage companies. FHA loans need to 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. The role of HUD is to insure FHA loans originated and funded by private banks and lenders. HUD will insure private HUD-approved lenders in the event homeowners default on their FHA loans and the property go into foreclosure.
What Function Does HUD Play In Lending?
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. In order for HUD to insure FHA Loans, lenders need to meet HUD agency mortgage guidelines.
What Is The Federal Housing Administration
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 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 creates and implements the 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 verlays 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 to be eligible for FHA loans. Borrowers with credit scores under 580 and down to 500 require a 10% down payment per HUD 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.
What Are FHA Lender Overlays
FHA lender overlays refer to additional requirements or restrictions imposed by individual lenders on top of the minimum guidelines set by the Federal Housing Administration (FHA). The FHA establishes basic eligibility criteria for borrowers and properties to qualify for FHA-insured loans, but individual lenders may implement their own overlays to manage risk and ensure that loans meet their specific criteria.
How Does Lender Overlays Affect FHA Loans
FHA lender overlays can include stricter credit score requirements, lower debt-to-income ratios, additional documentation requirements, and other conditions that borrowers must meet to qualify for an FHA loan through that particular lender. Lenders may impose overlays to mitigate their risk and ensure that the loans they originate are more likely to be repaid successfully.
Understanding FHA Lender Overlays
It’s essential for borrowers to be aware of FHA lender overlays when seeking an FHA loan, as they can vary from one lender to another. If a borrower doesn’t meet the overlays of one lender, they may still be eligible with a different lender that has more lenient requirements. Borrowers are encouraged to shop around and compare offers from different FHA-approved lenders to find the best terms and conditions that suit their financial situation.
What Are FHA Lender Overlays on Debt-To-Income Ratios
Lenders can have FHA lender overlays on debt-to-income ratio. Mortgage companies often have overlays on debt-to-income ratio caps that are below the maximum debt-to-income ratios allowed by HUD. 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 and 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. Each lender can have lender overlays on lending requirements on FHA loans.
All mortgage borrowers 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.
What Are Typical FHA Lender Overlays By Mortgage Companies
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
- 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 email@example.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.