This BLOG On What Are Lender Overlays And What Are Common Overlays Was UPDATED And PUBLISHED On November 5th, 2019
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
- These are called lender overlays
In this article, we will cover and discuss what are lender overlays.
Lenders Overlays Explained
What are mortgage lender overlays?
- 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 FHA credit scores 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
What Are Lender Overlays: Example Of Lender Overlays
What Are Lender Overlays?
Here is an example of 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
- 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
- The Gustan Cho Team at Loan Cabin Inc. 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 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
Credit Tradelines Overlays
Other overlays include minimum credit tradelines.
- Most 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 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, please contact us at 1-262-716-8151 or text us for faster response. Or email us at email@example.com. We are available 7 days a week, evenings, weekends and holidays.