Mortgage Agency Guidelines Versus Overlays on Home Loans
This guide covers the difference between mortgage agency guidelines versus overlays on home loans: Many mortgage borrowers ask, “What are mortgage agency guidelines versus overlays. ” There are two types of mortgage agency guidelines versus overlays.
The federal mortgage guidelines are implemented by the various mortgage loan programs such as FHA, VA, USDA, Fannie Mae, and Freddie Mac.
The agencies set the minimum mortgage lending requirements for borrowers. Borrowers must meet the minimum mortgage lending guidelines of each mortgage loan program they apply for. Every loan program has different mortgage guidelines. This article will discuss and cover mortgage agency guidelines versus overlays on home loans.
Common Lender Overlays On Government And Conventional Loans
There are mortgage guidelines with respect to the minimum credit score, debt-to-income ratios, outstanding collection accounts, waiting periods after a prior bankruptcy, prior foreclosures, judgments, and charge-off accounts. late payments, tax liens, co-borrowers, non-occupant co-borrowers, manual underwriting, deferred student loans, seasoning requirements to refinance a home loan after a home purchase, cash-out refinance loan to value limits, gaps in employment, part-time and other income, bank statements, unreimbursed expenses, verification of rent, and other credit and financial factors of borrowers.
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Example Of Mortgage Agency Guidelines Versus Overlays on Home Loans
Here is a case scenario on Mortgage Agency Guidelines Versus Overlays: For Example, HUD has mortgage lending guidelines where the minimum credit score required by a borrower is 580 FICO to qualify for a 3.5% down payment FHA home purchase loan. FHA allows borrowers with credit scores of under 580 FICO to qualify for an FHA loan.
HUD mortgage guidelines on borrowers who have credit scores under 580 FICO credit scores require that the home buyer put at least a 10% down payment.
Fannie Mae and Freddie Mac have their mortgage guidelines. The minimum credit score to qualify for a Conventional loan is 620 FICO credit scores. FHA loans and Conventional loans are the two most popular mortgage loan programs. We will discuss mortgage guidelines on FHA and Conventional loans in this article.
Typical Mortgage Agency Guidelines Versus Overlays
The second type of Mortgage Guidelines are called mortgage lender overlays: Lender overlays are mortgage lending guidelines imposed by each lender on top of the federal minimum mortgage lending guidelines. For example, FHA only requires a 580 FICO Credit Score to qualify for an FHA home purchase mortgage loan with a 3.5% down payment.
Most banks will not accept any Borrowers who do not have at least a 640 FICO credit score. This is called a lender overlay on credit scores imposed by banks. Same with collection accounts.
FHA does not require the borrower to pay off outstanding collection accounts and charge off accounts. However, many banks and mortgage companies will require that Borrowers pay off all outstanding collection accounts and charge-offs to qualify for an FHA loan with their mortgage lending institution. This is called a mortgage lender overlay on collection accounts.
Getting Approved For a Mortgage With a Lender With No Overlays
Borrowers who meet the minimum FHA or Conventional mortgage lending guidelines and need a mortgage lender with no overlays, contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We specialize in FHA, VA, USDA, and Conventional loans with no lender overlays.
FHA Mortgage Agency Guidelines Versus Overlays
FHA loans are the most popular mortgage loan program in the United States. FHA is part of the United States Department of Housing and Urban Development, often known as HUD by many, and has one of the most lenient mortgage lending guidelines out of all mortgage loan programs.
The minimum credit score required to qualify for Conventional loans is 620 FICO credit scores. With conventional loans, mortgage rates depend on credit scores and loan-to-value.
The higher the credit score, the lower the mortgage rate. The lower the loan to value, the lower the mortgage rates. HUD sets FHA Lending Guidelines through its HUD 4000.1 FHA Handbook, a comprehensive 800-plus page of rules and regulations FHA-approved mortgage lenders must abide by. Lenders must adhere to the FHA Loans they originate and fund to be insurable against borrower’s default.
Basic FHA Guidelines
There are too many FHA Mortgage Guidelines to list in this article. However, here are the bullet points of FHA: Minimum Credit Scores 580 FICO to qualify for a 3.5% down payment FHA loan. Borrowers with credit scores of under 580 FICO can qualify for an FHA loan. However, a 10% down payment is required. The minimum credit score required to qualify for an FHA loan is 500 FICO.
Maximum debt-to-income ratios up to 56.9% DTI if credit scores exceed 620 FICO. Debt-to-income ratios are below 43% DTI if the borrower has credit scores of under 620 FICO. Outstanding collection and charge-off accounts do not have to be paid off to qualify for an FHA loan.
Non-occupant co-borrowers related to the borrower by blood, marriage, or law can be added to the FHA loan. 2-Year Waiting Period After Chapter 7 Bankruptcy discharged date to qualify for FHA loan. Those who are one year into Chapter 13 bankruptcy can qualify for an FHA loan.
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Mortgage Charge-Off Guidelines
Mortgage charge-offs with the balance reported on the credit report do not matter as long as they have been seasoned for at least three years. The charge-off balance does not have to be paid off—a year waiting period after a loan modification to qualify for an FHA loan. 100% gifted funds are allowed for the down payment, and up to 6% of sellers’ concessions are allowed by the home seller to the home buyer.
Fannie Mae and Freddie Mac Mortgage Guidelines Versus Overlays
Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set the standards and mortgage guidelines for conventional loans. Mortgage lenders need to follow Fannie Mae and Freddie Mac mortgage lending guidelines if they want to sell the conventional loans they originate and fund to the secondary market so they can relieve their warehouse lines of credit.
There are too many Conventional mortgage guidelines to list in this article, but here are the main Fannie Mae and Freddie Mac mortgage guidelines that most borrowers have questions about.
Fannie Mae requires a minimum 3% down payment on home purchases for first-time home buyers. Freddie Mac will allow a 3% down payment for homebuyers who have not owned a home for at least three years. Normally, a 5% down payment is required on all Conventional loans.
Conventional Mortgage Guidelines
Conventional loans are not insured by the government like FHA loans are, and private mortgage insurance is required for any loan-to-value greater than 80% loan-to-value. The private mortgage insurance premium will depend on the borrower’s credit scores, loan-to-value, and property type. There is a four-year period to qualify for a conventional loan after a Chapter 7 Bankruptcy discharge date. There is a two-year waiting period to qualify for a Conventional loan after a Chapter 13 Bankruptcy discharge date/ There is a four-year waiting period to qualify for a conventional loan after a short sale or deed in lieu of foreclosure. After a foreclosure, there is a 7-year waiting period to qualify for a conventional loan.
Mortgage Included In Bankruptcy Guidelines
Mortgage part of Bankruptcy: For borrowers with a prior mortgage part of bankruptcy, there is a four-year waiting period to qualify for a conventional loan after the discharge date of the Chapter 7 Bankruptcy. This holds true even if the recorded foreclosure date is recorded later. This is not with FHA Loans.
There is no waiting period after the Chapter 13 Bankruptcy discharge date. There is a three-year waiting period after foreclosure, a deed-in-lieu of foreclosure, and a short sale to qualify for an FHA loan.
FHA loans have a three-year mandatory waiting period to qualify for an FHA loan from the recorded date of the foreclosure. The discharge date of Chapter 7 Bankruptcy does not matter.
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Most Lenders Have Overlays
Just because borrowers meet the minimum FHA or Fannie Mae/Freddie Mac mortgage lending guidelines does not mean that all lenders will approve you for a home loan. Gustan Cho Associates is one of the few national lenders with no overlays.
Most lenders have mortgage guidelines of their own that surpass the minimum FHA and Conventional Loan Mortgage Guidelines. These additional guidelines are called mortgage lender overlays.
For example, the FHA minimum credit score requirement to qualify for an FHA loan is 580 FICO. Most mortgage companies will not approve borrowers who do not have at least a 640 FICO credit score. This is called lender overlays on credit scores. Same with debt-to-income ratios. FHA allows a maximum of 56.9% debt-to-income ratios for FHA borrowers with credit scores of at least 620 FICO or higher. Most FHA-approved mortgage lenders cap the debt-to-income ratios to 45% DTI or 50% DTI.
Qualifying and Getting Approved For a Mortgage With Bad Credit
Another common overlay is outstanding collection accounts. FHA does not require that outstanding unpaid collection accounts be paid off. Most mortgage companies will require all outstanding unpaid collection accounts to be paid in full.
Some even require a two-year seasoning after the collection accounts and charge-off accounts have been paid off for them to approve borrowers.
Homebuyers looking for a mortgage loan officer specializing in no lender overlays FHA and Conventional Loans, contact us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays, to take your calls or emails and answer any of your questions.
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This BLOG on mortgage agency guidelines versus overlays was UPDATED on December 3rd, 2023.
