No Overlays – Mortgage Lender Overlays Discourage Borrowers
Often borrowers are discouraged from mortgage lender overlays by being denied because a bank has an internal set of guidelines on top of FHA, VA, USDA, Fannie Mae, and Freddie Mac guidelines. What some lenders do is add their own requirements to already established rules making it more difficult getting approved for a loan. Work with a lender with no overlays because often time/money can already be invested and the result is a last minute denial in underwriting.
Just because a borrower does not qualify with one lender does not mean they will not qualify for another – loan denials are not uncommon. Many times we see borrowers who have applied to multiple lenders, which they have been denied and realize that the lender has an internal guideline on top of an established guideline. It is important to be upfront with your Loan Originator so that they can structure the loan properly to save time and prevent confusion during the underwriting process.
Some of the More Common Overlays
Requiring a minimum credit score
Bankruptcy and foreclosure seasoning
Types of properties
Cash reserve requirements
Insufficient funds on bank statements
Collections and charge offs
The minimum standards for an FHA loan depends on the bank, lender, or broker, which they add their own requirements for approving an FHA loan. The U.S. Department of Housing and Urban Development (HUD) set standards for FHA mortgages and is published in the FHA Handbook 4000.1.
Some Examples of FHA Overlays
Not willing to do a manual underwrite. A lender is not willing to underwrite a loan with a refer/eligible automated underwriting (AUS) findings, which can often be triggered due to many factors. Examples would be, but not limited to: paying off collections and non-traditional credit.
Requiring a minimum credit score: requiring a minimum credit score of 580, 600, and 620. The minimum required investment for a FHA Purchase is 3.5% with a 580 FICO score and 10% with under a 580 FICO score.
Not allowing a manual underwrite. With refer/eligible automated underwriting findings, a borrower can qualify for a VA loan if all criteria is met.
Minimum credit score. Some lenders require a minimum credit score of 600, 620, or 640, but the VA does not mandate a minimum credit score.
Fannie Mae and Freddie Mac have selling and servicing requirements that are published with minimum standards. Any rule on top of what the Single Family/Service Guide publishes is considered a mortgage overlay.
Examples of Conventional Overlays
Debt-to-income ratios being too high. We have programs that do not take debt-to-income into consideration and the property will qualify based on cash flow.
Requiring a minimum credit score.
Requiring a minimum down payment. For first time home buyers, the home possible and home ready program requires as little as 3% down. Nationwide Mortgage also has a 1% down program and grant programs with no repayment.
Example of Refinance Overlays
For an FHA Streamline, requiring a borrower to have a bankruptcy discharged for 2 years. A chapter 7 bankruptcy just has to be discharged. Can refinance in a chapter 13 with the trustee's approval.
With limited documentation, some lender will deny a mortgage supplement verifying late payments that has bankruptcy on the mortgage supplement. In most cases, this does not mean that the bankruptcy is in the payment, but the borrower continued to make payments during the bankruptcy and kept the mortgage outside.
A utility bill showing that there is a previous balance still due.
A non-qm loan is considered a portfolio loan meeting parameters outside FHA, VA, USDA, and conventional standards. These types of loans take a more common sense approach to the ability to repay and are subject to a case by case scenario.
Examples of ITIN Overlays
Not having a valid work VISA or social security number. We have access to ITIN programs that will allow temporary work agencies, no social security number or work VISA.
Examples of Fresh Start Program
Seasoning on bankruptcy, foreclosure, deed-in-lieu of foreclosure and short sale. We have Fresh Start loan programs that do not require seasoning after a bankruptcy, foreclosure, deed-in-lieu of foreclosure or short sale.
An overlay on non-cash out refinance transaction – The loan being ineligible if properties being listed for sale within 90 days of the new mortgage. A property must not be currently listed for sale and taken off the market before the disbursement date of the new loan when the transaction is a limited cash-out refinance. This is listed in Fannie Mae's Selling Guide.
Overlays are created to manage risk, reduce overhead, and a lender could add a specific rule because they may not have the resources to underwrite the loan. Often lenders sell specific types of loans on the secondary market and other types of loans are not in their niche. Just because a lender allows manual underwrites with borrowers less than 600 credit score does not mean their pricing will always be competitive. Some lenders will say they do not have overlays, but have bigger hits on pricing with lower credit scores and are not competitive with the rate – some lenders have smaller hits on pricing for borrowers with lower credit scores.
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Nicholas Auriemma is a Loan Originator at Nationwide Mortgage & Realty, LLC, providing information on mortgages that can often be confusing even to real estate and mortgage professionals. Borrowers can be discouraged because mortgage professionals can be mistaken due to guidelines always changing, the extent of guidelines, their company having an overlay (a stricter guideline), or other lenders not offering a loan program. Call or text Nick anytime at 630-779-8430 or email at firstname.lastname@example.org.
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All loans are subject to credit, underwriting and property approval guidelines. Offered loan products may vary by state. There is no guarantee that all borrowers will qualify. Restrictions may apply. This is not a commitment to lend. Terms, conditions and programs are subject to change without notice. Nationwide Mortgage & Realty, LLC is not acting on behalf of or at the direction of HUD/FHA or any government agency. CO: Check license status of your mortgage loan originator at www.dora.state.co.us/real-estate/index.htm. Also licensed in: FL. VA, and TX: NMLS ID 276777. Illinois Residential Mortgage License | MB. 6760210. WA: Consumer Loan License MB-276777. GA: Georgia Residential Mortgage Licensee 60857