What Are Lender Overlays Versus Agency Mortgage Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On  What Are Lender Overlays Versus Agency Mortgage Guidelines Was UPDATED And PUBLISHED On November 3rd, 2020

What Are Lender Overlays Versus Agency Mortgage Guidelines:

  • Agency Mortgage Guidelines are the minimum lending guidelines imposed by FHA, VA, USDA, FANNIE MAE, FREDDIE MAC
  • All lenders need to adhere to the minimum agency mortgage guidelines on government and/or conventional loans
  • However, lenders can have higher lending guidelines that are above and beyond the minimum agency mortgage guidelines which are called lender overlays
  • It is not illegal for lenders to have tough lender overlays
  • Due to lender overlays, not all lenders have the same lending requirements on FHA, VA, USDA, and conventional loans

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
  • These are called lender overlays

In this article, we will cover and discuss what overlays are as well as common lender overlays imposed by lenders.

Lender Overlays ExplainedWhat Are Lender Overlays

What are overlays imposed by mortgage lenders?

Every lender can have their own lender overlays when it comes to what type of borrower they want:

There are two types of mortgage lending criteria:

  • The first is government and conventional loan minimum requirements
  • The second is mortgage company overlays

Just because 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 agency credit score requirements are 580 FICO for 3.5% down payment FHA Loans under HUD Guidelines
  • However, most mortgage companies may require higher credit scores
  • This holds true 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 overlays

We just go off minimum government and conventional loan guidelines.

Typical Common Overlays Imposed By Lenders

Lenders can have overlays on just about anything. Not all lenders have the same lender overlays.

Here is an example of common lender 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
  • Lenders do have to meet the 580 FICO in order for HUD to insure the FHA Loan
  • But they can also require higher credit scores
  • Many 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 lenders that will have their own overlays on credit scores
  • 600 FICO scores might be a minimum for one lender while some may have it at 620 FICO

Gustan Cho Associates has no overlays on FHA Loans.

Debt To Income Ratio OverlaysWhat are Debt To Income Ratio Overlays

Another example of overlays are debt to income ratio:

The maximum debt to income ratio allowed for a FHA 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 lenders where they will not institute an overlay when it comes to debt to income ratio limits
  • However many lenders will have their own overlays when it comes to debt to income ratios

The majority of lenders have debt to income ratio overlays set at 50% while others are more stricter.

Lender Overlays On Credit Tradelines

Other overlays include minimum credit tradelines. Credit tradelines are credit accounts borrowers have established for a period of at least one year and report to the credit bureaus.

  • Most lenders have minimum credit tradeline requirements as part of their lender overlays
  • Common overlays on credit tradelines is requiring 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

Having credit tradelines is not required on any home mortgage program. Minimum credit tradelines requirements are lender overlays set by individual mortgage lenders.

Mortgage Loan Denied Because Of OverlaysWhy Mortgage Loan Denied Because Of Lender Overlays

Borrowers who have been denied by lenders because of lender overlays, no worries:

There are hundreds of lenders with different 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 on government and conventional loans, please contact us at Gustan Cho Associates at 1-262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends and holidays.

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