What Are Mortgage Lender Overlays On Home Loans

This BLOG On What Are Mortgage Lender Overlays Was Written By Matthew Herbolich MBA JD LLM 

The arena for government home loan programs such as found with Department of Veterans Affairs, USDA, and the Federal Housing Administration place minimum lender criteria on those seeking home loans to purchase or refinancing their home. Government Backed Loans are owner occupied home loans that is insured and guaranteed by the government.

There are three types of government backed loans:

  1. FHA Loans
  2. VA Loans
  3. USDA Loans

The three government agencies are not lenders.

  • Their role is to insure banks and mortgage companies against losses in the event if borrowers default on their home loans and the property goes into foreclosure.
  • Due to this government guarantee and insurance lenders can offer borrowers low down payment home loans with low mortgage rates.
  • VA Loans and USDA Loans do not require any down payment.
  • Conventional Loans are not guaranteed by any government agencies.
  • Borrowers of conventional loans need to meet Fannie Mae and/or Freddie Mac Mortgage Guidelines in order for lenders to be able to sell these loans after they fund to the secondary market.

What Are Mortgage Lender Overlays And Are Their Lenders With No Overlays?

Again, mortgage lender overlays are mortgage guidelines that surpass the minimum lending guidelines of FHA, VA, USDA, Fannie Mae, and Freddie Mac. All borrowers need to meet the minimum mortgage guidelines of the loan program they are applying for. However, most lender will have mortgage guidelines that surpass the minimum mortgage guidelines. This additional extra mortgage lending requirement is called mortgage lender overlays.

  • Just because consumers have paid their dues and meet the minimum lending guidelines on a particular loan program it does not mean that they will qualify for a mortgage with all lenders.
  • The Gustan Cho Team at USA Mortgage are direct lenders with no lender overlays. 
  • Lenders with no lender overlays will just go off automated findings of Automated Underwriting System (AUS).

What Are Mortgage Lender Overlays: Typical Overlays By Lenders

Most mortgage lenders have lender overlays on the following:

  • Credit Scores:
    • Minimum credit scores to qualify for FHA Loans is 580 FICO for a 3.5% down payment home purchase
    • However, most lenders may require a 620 credit scores
    • This higher credit score requirement is called a mortgage lender overlay
    • Same with VA Loans
    • VA does not have a credit score requirement
    • But most VA Lenders may have a 620 minimum credit score requirement
    • This is called a mortgage lender overlay
  • Collection Accounts & Charged Off Accounts
    • FHA does not require that collections and charged off accounts with outstanding balances be paid off
    • However, most banks and lenders either want collections paid off and/or have caps on maximum outstanding collection account and/or charged off balances
    • For example, some lenders may require any collection account with an outstanding balance of $2,000 or greater to be paid off
    • This is not a HUD Guidelines and borrowers do not have to pay outstanding collection and charged off accounts to qualify for FHA Loans
    • This is an overlay on collections and charged off accounts
  • Debt To Income Ratio
    • Most lenders will have overlays on debt to income ratio
    • Borrowers can get an approve/eligible per Automated Underwriting System for FHA with a 46.9% front end and 56.9% back end debt to income ratio
    • However, many lenders may cap debt to income ratios at 45% to 50% as part of their DTI Overlays

Borrowers who do not qualify for mortgage loans with one lender may qualify with a lender with no lender overlays. Just because a lender is a direct lender does not mean that they are a lender with no mortgage overlays.

Lenders With No Lender Overlays For Credit Challenged Borrowers

Beneficial to the Homeowner to Get Mortgage Funding Directly with no “Overlays”

All lenders set their eligibility requirements for borrowers to obtain a mortgage.

  • These requirements vary widely, many with “overlays” and some with no “overlays.
  • There are mortgage lenders and banks now that offer mortgage loans with no “overlays.”
  • Also known as “direct lenders”, these programs are preferable (especially for challenged borrowers) to those lenders with overlays attached to their loan programs.
  • Private lenders offer a broad range of mortgage programs.
  • It is critical for a borrower to use a lender that does not have overlays for that borrower’s credit issue.

These (direct loans) with no ‘overlay” not only make it much easier for a borrower to qualify for a mortgage.

In Conclusion

A seasoned “direct” mortgage lender is ideal for borrowers, especially those who are credit challenged.

  • An important question to ask when deciding what mortgage professional to work with is whether or not they are “direct” or not.
  • I am looking to provide knowledge and education to other experts and real estate agents in the area of “overlays.” 

Over 75% of our borrowers are folks who either got a last minute mortgage loan denial or are stressing during the mortgage process. The main reason for stress during the mortgage process or last minute mortgage loan denial is due to the loan officer not properly qualifying borrowers. Just because a borrower gets an approve/eligible per Automated Underwriting System does not mean the home loan will close with lenders who have overlays. However, lenders with no lender overlays will just go off the findings of the Automated Underwriting System (AUS) and no worries about overlays.

About The Author Of What Are Mortgage Lender Overlays: Matthew Herbolich

Matthew Herbolich MBA JD LLM is the author of this blog What Are Mortgage Lender Overlays. Matthew Herbolich MBA JD LLM is a guest writer and contributing editor of Gustan Cho Associates Mortgage & Real Estate Information Center. Matthew is an expert in real estate and lending and has extensive experience in title. Matt Herbolich is an expert in residential, commercial, and alternative financing and brings his experience to The Gustan Cho Team at USA Mortgage. We are proud and honored in having Matthew Herbolich be part of The Gustan Cho Team and look forward to his many more informative blogs being published.

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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