What Are Lender Overlays By Mortgage Companies
In this blog, we will cover and discuss choosing a lender with no lender overlays when denied for a mortgage. Not all mortgage lenders are created equally. Just because home buyers need to qualify for FHA, VA, USDA, or Conventional Loans does not mean they can qualify with all mortgage lenders.
Understanding Lender Overlays
Lender overlays are additional rules or requirements that mortgage lenders impose on top of the standard guidelines set by government-backed entities like Fannie Mae, Freddie Mac, the FHA, the Department of Veterans Affairs, and the United States Department of Agriculture (USDA). These overlays are designed to manage risk more effectively and ensure loans meet the lender’s specific criteria.
Mortgage Companies With Lender Overlays
Unfortunately, many home buyers go to a lender and are told they do not qualify for FHA loans because their credit scores are not 620. The lender they went to does not tell them that they do not meet FHA Guidelines and that actually the borrowers do qualify for FHA loans but not with that particular lender. Speak With Our Loan Officer for Mortgage Loans
Why Do Lenders Have Overlays?
Lenders implement overlays to protect themselves from potential risks associated with borrower defaults. While government-backed entities set minimum standards for loan approval, lenders may feel these standards do not sufficiently mitigate risk. Therefore, they add their requirements to ensure borrowers are at a lower risk of defaulting on their loans.
Common Types of Lender Overlays
Lender overlays can vary widely but often include the following:
- Credit Score Requirements:
- Higher Minimum Scores: Lenders may require higher credit scores than the minimum set by the loan program. For example, while an FHA loan might require a minimum credit score 580, a lender might set their minimum at 620.
- Debt-to-Income (DTI) Ratios:
- Stricter DTI Limits: Some lenders impose stricter DTI ratio limits than the standard guidelines, meaning borrowers must have a lower percentage of their income toward debt payments.
- Employment History:
- Longer Employment Requirements: Lenders might require a longer employment history or more stable employment than what the basic guidelines stipulate.
- Property Types:
- Additional Restrictions: Certain property types, such as condominiums, multi-family homes, or properties in specific locations, may face additional restrictions or require more documentation.
- Reserves:
- Savings Requirements: Lenders might insist borrowers have several additional months’ worth of mortgage payments set aside in reserves.
How Lender Overlays Affect Borrowers?
Lender overlays can make it more challenging for borrowers to qualify for a mortgage. Even if a borrower meets the basic requirements of a government-backed program, they may still be denied if they don’t meet the lender’s additional criteria. Here are a few ways overlays impact borrowers:
- Increased Difficulty in Qualification: Borrowers may need higher credit scores, lower DTI ratios, or more savings to qualify for a loan.
- More Documentation: Borrowers might have to provide additional documentation to satisfy overlay requirements.
- Higher Denial Rates: More stringent requirements can lead to higher denial rates for borrowers who would otherwise qualify under standard guidelines.
Strategies to Overcome Lender Overlays
Borrowers can take several steps to navigate lender overlays and improve their chances of securing a mortgage:
- Shop Around:
- Compare Lenders: Not all lenders have the same overlays. By shopping around, borrowers can find lenders with fewer or no overlays.
- Improve Financial Profile:
- Boost Credit Score: Improving your credit score can help you meet higher credit requirements.
- Reduce Debt: Lowering your DTI ratio by paying down debts can make you a more attractive borrower.
- Save More: Having more savings can help meet reserve requirements.
- Work with a Mortgage Broker:
- Access to Multiple Lenders: Brokers have access to multiple lenders and can help you find those with fewer overlays.
Lender overlays are an essential aspect of the mortgage approval process, providing lenders with a way to manage risk and ensure loan quality. While they can pose additional challenges for borrowers, understanding these overlays and preparing accordingly can help navigate the mortgage landscape more effectively. By improving your financial profile, shopping around for different lenders, and working with a knowledgeable mortgage broker, you can enhance your chances of securing a mortgage that meets your needs.
What Is The Lowest Credit Score To Get FHA Loan?
FHA Guidelines on credit score requirements are 580. Most lenders will have higher credit score requirements called lender overlays. Lender overlays are additional lending requirements above and beyond the minimum agency requirements of FHA, VA, USDA, Fannie Mae, and Freddie Mac. Speak With Our Loan Officer for FHA Loans with low credit score
Importance Of Choosing a Lender With No Overlays
Gustan Cho Associates is a mortgage broker licensed in 48 states with over 160 wholesale mortgage lenders with no lenders overlays on government and conventional loans. Lender overlays do get in the way of thousands of Americans obtaining mortgages.
What Is A Lender With No Lender Overlays?
Overlays are extra guidelines set by financial lending institutions above and beyond the HUD, VA, USDA, Fannie Mae, and Freddie Mac guidelines. It is important for borrowers with less-than-perfect credit or other credit/income issues to consult with a direct lender with no overlays. Today we will discuss a client the Gustan Cho Associates was able to approve recently. For the purpose of this blog, we will use the name Brian Smith as the borrower and Brenda Smith as the co-borrower.
Importance Of Pre-Approval Letter
Brian and Brenda had trouble obtaining an FHA loan with two lenders before they reached out to Gustan Cho Associates The first lender sent them a pre-approval letter after reviewing their income and asset documentation. That was solid enough for them to put in an offer on a house in the suburbs of Chicago.
What Is The Earnest Money Deposit?
At this stage, Brian and Brenda put down $2000 in NON-REFUNDABLE earnest money and paid $350 for a home inspection. They also ordered their FHA appraisal for $550. From this pre-approval letter, they have spent $2900 out of pocket. We all know buying a home can be nerve-wracking, and this is the point when their story gets complicated.
The Main Reasons for a Last-Minute Mortgage Loan Denial
The number one reason for a last-minute loan denial or stress during the mortgage process is that the loan officer did not properly qualify borrowers. Loan Officers should not issue pre-approval letters.
The true definition and term of pre-approval are that a certified mortgage underwriter has fully reviewed all mortgage docs and has fully underwritten the borrowers.
Once the underwriter feels that the borrower is fully qualified after reviewing and underwriting the file, the mortgage underwriter will sign, date, and issue the pre-approval letter. A pre-approval letter is a full loan commitment and an offer to lend by the mortgage company. There should be no reason why borrowers with a solid Bonafede pre-approval should get denied or stressed during the mortgage process.
Who Issues Pre-Approval Letter?
A Loan Officer should never issue a pre-approval letter. Loan Officers can issue pre-qualification letters where homebuyers can shop for homes. Home Buyers should never enter into a real estate purchase contract without a solid pre-approval letter that has been underwritten and signed, dated, and issued by a mortgage underwriter. There is no reason why a pre-approved client should ever be denied a mortgage.
Get Pre-Approval for your mortgage loans
Case Scenario on Going Through the Mortgage Process
Let us continue with our case scenario. Lender number one sent the pre-approval letter after receiving AUS findings saying approve/eligible. The Loan Officer counted ALL of Brenda’s income, including overtime. This was a mistake. Brenda has only been at her FULL-TIME W2-earning job for 9 months. She does not have a two-year history of receiving overtime income.
Verification of Employment
Under HUD 4000.1 FHA Handbook, borrowers must have a two-year history showing they have received overtime pay in order for the income to count as qualified income. Not only that, the likelihood of overtime income continuing for three years is very crucial. This is verifiable through VOE or verification of employment forms. This is a standard form in the mortgage industry.
Third-Party Verification of Employment Vendors
There are many third-party verification options such as the work number to gather verification of employment information. If the borrowers’ information is not available through third-party verification, the mortgage company must obtain a manual verification of employment. This must ITEMIZE how employees are paid.
The Borrower File Needs To Be Fully Processed And Underwritten Before Being Issued Pre-Approval
Homebuyers and sellers trust that when a lender issues a pre-approval, they are issuing a commitment to lend. Unfortunately, many mortgage companies call a pre-qualification letter a pre-approval letter. To avoid a potential last-minute loan denial and/or stress during the mortgage process, make sure that the pre-approval has been signed off by a mortgage underwriter and not a loan officer.
How Loan Officers Should Prepare and Issue Pre-Approval Letters
A pre-approval letter should never be issued if the borrower’s file has not been fully processed by a mortgage processor and an underwriter has not underwritten the file. For example, it must break down hourly pay, and overtime or bonus income. As long as a two-year history can be established, overtime income can count. Back to our story, the loan went to the underwriting stage with lender number one.
Using Overtime Income As Qualified Income
The underwriter removed Brenda’s overtime income and the AUS system was now coming back with refer-eligible findings for debt-income ratios and credit score profiles. Lender number one does not allow manual underwriting. A loan must be downgraded to a manual underwrite when the AUS system shows Refer/ Eligible findings. This was not a lender with no overlays since they did not allow manual underwriting
Choosing Second Lender With No Overlays After Being Denied For Mortgage
Most folks do not hesitate to just choose the next lender in line without doing much research when denied by their original first lender. By this time, most buyers and sellers are stressed so they take a realtor’s advice and transfer their file to the next lender on a list. This is when Brenda and Brian contacted lender number two. A lender who does allow manual underwriting. Keep in mind the appraisal was back by this stage in the process. Click here to apply for mortgage with no overlays
FHA Appraisal Transfer From One Lender to a Different Lender
An FHA appraisal can be transferred with the FHA case number from lender to lender. Since the appraisal was added to the loan file with lender number two, they started underwriting right away. During the manual underwrite and the verification of employment stage, the underwriter concluded they would not be able to approve the loan. This was due to the fact Brenda was a stay-at-home mother for the past 4 years prior to starting her job 9 months ago. That underwriter failed to offer the true solution to closing this loan
Final Solution After Being Denied By Multiple Mortgage Lenders
Most of our borrowers have almost given up on trying to get qualified for a mortgage after being denied by multiple lenders. A large percentage of our borrowers search the internet for solutions and find us from the countless five-star national reviews and testimonials Gustan Cho Associates has. This is when Brian and Brenda contacted the pros of Gustan Cho Associates, which is a true lender with no overlays.
Qualifying With a Lender with No Lender Overlays
When we state that we are a lender with no overlays, we have ZERO OVERLAYS on all of our agency mortgage programs. The missing key to the puzzle is borrowers only need to reestablish a full-time W2 job for SIX months to count their income.
Gap in Employment Guidelines on FHA Loans
AS LONG AS Brenda had a two-year history AT SOME POINT IN HER LIFE PRIOR TO HER JOB GAP, that income can be counted. As part of the manual underwrite, the processor was able to verify her full-time two-year working history as a babysitter while she was in college. We were able to verify and DOCUMENT her history of babysitting with the family. Brian and Brenda could not be happier now that they were able to close the loan.
Getting a Clear to Close For Mortgage
It takes true underwriting experience to get loans to the finish line. Brian and Brenda have gotten a full loan commitment to lend by one of our fine mortgage underwriters and are expecting to close in the coming days. They could not be any happier in finding and choosing a true lender with no overlays.
Qualifying With Lender With No Overlays
At Gustan Cho Associates, there are very few situations we have not seen before! We underwrite all files upfront before any of these situations come up. If Brenda and Brian would have came to us to start, this added stress would not have happened. Qualifying with lender with no overlays
TBA Underwriting Process on FHA Loans
We use the TBD UNDERWRITING PROCESS for all clients who come to us to start. Right now, about 75% of our clients come from other lenders, either who issued a denial or are just not offering the customer service expected. We take our jobs seriously as there are a lot of moving parts when you buy and sell a home. We know that you will be spending a lot of your time and money on your new home
Frequently Asked Questions (FAQs)
- What are lender overlays?
Lender overlays are additional guidelines or requirements that mortgage lenders impose on top of the standard guidelines set by government-backed entities like Fannie Mae, Freddie Mac, FHA, VA, and USDA. - Why do lenders have overlays?
Lenders implement overlays to manage risk more effectively. These additional requirements help protect the lender from potential borrower defaults and ensure that loans meet their specific risk criteria. - How do lender overlays affect borrowers?
Lender overlays can make it more challenging for borrowers to qualify for a mortgage. Even if a borrower meets the basic requirements of a government-backed program, they may only be allowed if they meet the lender’s additional criteria. - What are common types of lender overlays?
Credit Score Requirements: Lenders may require a higher credit score than the minimum loan program requires.
Debt-to-Income (DTI) Ratios: Some lenders impose stricter DTI ratio limits.
Employment History: Lenders might require a longer employment history or more documentation.
Property Types: Certain property types, like condos or multi-family homes, may have additional restrictions.
Reserves: Lenders might require borrowers to have several additional months’ worth of mortgage payments saved in reserves. - Can lender overlays vary between lenders?
Yes, lender overlays can vary significantly between different lenders. One lender may have strict overlays, while another may have more lenient or no overlays. - How can borrowers avoid lender overlays?
To avoid lender overlays, borrowers can:
Shop Around: Compare multiple lenders to find one with fewer or no overlays.
Improve Financial Profile: Boost your credit score, reduce debts, and ensure stable employment to meet stricter criteria.
Work with a Mortgage Broker. Mortgage brokers have reached various lenders and can assist you in locating those with fewer overlays. - Do all lenders have overlays?
Not all lenders have overlays. Some lenders, especially those specializing in government-backed or non-QM (non-qualified mortgage) loans, may adhere strictly to the minimum guidelines without additional overlays. - Are lender overlays the same for all types of loans?
No, lender overlays can differ based on the type of loan. For instance, overlays on FHA loans may differ from those on conventional or VA loans. - What should I do if a loan is denied due to lender overlays?
If you are denied a loan due to lender overlays:
Ask for Specific Reasons: Understand exactly why you were denied.
Improve Your Financial Situation: Tackle the specific issues that caused the denial, such as enhancing your credit score or lowering your debt.
Seek Alternative Lenders: Find lenders with fewer or no overlays willing to work with your financial situation. - How do overlays impact the mortgage approval process?
Overlays can make the mortgage approval process more stringent and potentially longer. Borrowers might need to submit extra documentation or meet stricter standards, which can add time and complexity to the process.
Mortgage Lender With No Lender Overlays
Gustan Cho Associates are experts with guidelines, and if you do not qualify today, we will create a custom plan for you to qualify in the near future! Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders due to lender overlays. We can be reached at 800-900-8569 or by text for a faster response. You can also email us at alex@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. Speak With Our Loan Officer for Mortgage Loans
