What Are Lender Overlays And What Are Common Overlays

This BLOG On What Are Lender Overlays And What Are Common Overlays Was UPDATED On July 14, 2017

What Are Lender Overlays? When it comes to mortgage guidelines, there are two types of mortgage lending requirements:

  • Minimum Mortgage Guidelines from Loan Programs (FHA, VA, USDA, FANNIE, FREDDIE)
  • The second type of mortgage guidelines are separate lending guidelines mandated by each individual lender which are called lender overlays.

Lenders Overlays Explained

What are mortgage lender overlays?

  • Every mortgage lender can have their own lender overlays when it comes to what type of mortgage loan borrower they want.
  • There are two types of mortgage lending criteria.
  • The first is government and conventional loan minimum requirements and the second is mortgage company overlays. 
  • Just because a mortgage loan borrower meets the bare minimum FHA, VA, USDA, Fannie Mae and/or Freddie Mac lending guidelines does not mean that they are guaranteed a home loan
  • For example, minimum FHA mortgage loan credit scores are 580 FICO for 3.5% down payment FHA Loans under HUD Guidelines
  • However, most mortgage companies may require higher credit scores even though HUD only requires 580.
  • Lenders can have a right to have higher mortgage lending requirements.
  • Most lenders have their own minimum credit score requirements which override FHA’s minimum standards which are called overlays.
  • There are lenders like myself where we have no lender overlays and just go off minimum government and conventional loan guidelines.

What Are Lender Overlays: Example Of Lender Overlays

What Are Lender Overlays?

  • Here is an example on what are lender overlays common overlays.
  • HUD Guidelines On Credit Scores on 3.5% down payment FHA Loans is 580 FICO. 
  • Just because HUD Guidelines On Credit Scores is 580 does not mean that all lenders need to abide to the 580 credit scores.
  • FHA Lenders do have to meet the 580 FICO in order for FHA to insure the FHA Loan but they can also require higher credit scores.
  • Many mortgage lenders have their own overlays. 
  • Most mortgage company’s overlays on minimum credit scores for FHA mortgage loans are 620 FICO. 
  • Most banks require 640 FICO.
  • However, there are mortgage lenders that will have their own overlays on credit scores. 
  • 600 FICO scores might be a minimum for one mortgage lender while some may have it at 620 FICO.
  • The Gustan Cho Team has no overlays on FHA Loans.

Debt To Income Ratio Overlays

Another example of overlays are debt to income ratio.

  • The maximum debt to income ratio allowed for a FHA mortgage loan is  46.9% front end DTI and maximum back end DTI of 56.9% in order to get an approve/eligible per Automated Underwriting System (AUS) approval.
  • There are mortgage lenders where they will not institute an overlay when it comes to debt to income ratio limits.
  • However many mortgage lenders will have their own overlays when it comes to debt to income ratios. 
  • The majority of FHA mortgage lenders have debt to income ratio overlays set at 50% while others are more stricter.

Credit Tradelines Overlays

Other overlays include minimum credit tradelines.

  • Most mortgage lenders have set an overlay of 3 credit tradelines seasoned for at least a year. 
  • Others will take into account non traditional credit such as rent verification, utilities, cell phones, and cable television payment history as credit line tradelines as long as it can be proven by cancelled checks.

Mortgage Loan Denied Because Of Lender Overlays?

FHA Borrowers who have been denied by a mortgage lender because of lender overlays, no worries.

  • There are hundreds of mortgage lenders with different mortgage overlays requirement.
  • There are many lenders with no overlays.
  • Borrowers should be able to find the right lender. 
  • In the event mortgage applicants do not qualify with a particular lender, they can qualify with another lender.

Home Buyers who need to qualify for FHA Loans with  a lender with no overlays, please contact us at 1-800-900-8569 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends and holidays.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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