What Are Lender Overlays

This guide covers what are lender overlays imposed by mortgage lenders. Lender overlays are mortgage guidelines imposed by the individual mortgage company above and beyond the minimum agency mortgage guidelines from HUD, VA, USDA, Fannie Mae, and Freddie Mac. The single biggest lender overlays from mortgage companies are lender overlays on credit scores.

Overlays on credit scores are higher credit score requirements imposed by individual lenders that are higher than those imposed by FHA, VA, USDA, Fannie Mae, and Freddie Mac.

Every mortgage loan program has minimum credit score requirements. Two of the most popular mortgage loan programs in the United States today is FHA and Conventional loans. We will be covering FHA and Conventional loans on this article. HUD Guidelines on credit score requirements to qualify for an FHA loan on a home purchase with 3.5% down payment is 580 credit scores. However, overlays on credit scores do exist by most mortgage lenders. In this article, we will cover and discuss overlays on credit scores by lenders versus agency Guidelines.

Typical Common Overlays By Mortgage Lenders

Most banks have overlays on credit scores where they will require a minimum credit score requirement of 640 FICO credit scores for all FHA mortgage loan borrowers: This holds true even though HUD only requires a minimum credit score requirement of 580 FICO credit scores to qualify for a 3.5% down payment home purchase FHA loan.

HUD also permits for borrowers with credit scores under 580 credit scores to qualify for FHA loans. However, HUD will require 10% down payment for all Borrowers with credit scores under 580 credit scores.

Most lenders with overlays on credit scores will not approve, originate, and fund FHA loans for borrowers with credit scores under 580 FICO credit scores even though HUD allows it. Borrowers with credit scores down to 500 credit scores can qualify for FHA loans under HUD Guidelines. Again, most Lenders will not want to touch anyone with such low credit scores. This holds true even though HUD will insure the FHA loans.  Click here for find a mortgage lender

Fannie Mae Credit Score Guidelines on Conventional Loans

Minimum credit score requirements for Conventional loans is 620 FICO credit scores. Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set the standards for Conventional loans. Hombuyers of second homes and investment properties need to go with Conventional loans. This is because FHA, VA, and USDA are only for owner occupant primary residential properties. Government loans are not for a second home or investment properties. Lenders do have overlays on credit scores on Conventional loans. Most may require a credit score of 680 FICO. This holds true even though Fannie Mae and Freddie Mac only requires a 620 FICO minimum credit score requirement.

Importance of Credit Scores

Credit scores is one of the most important factors that determine mortgage rates for mortgage borrowers. However, the importance of credit scores plays more of an impact on the mortgage qualification process than just determining mortgage interest rates, especially with FHA loans. Credit scores are deciding factors on debt-to-income ratio qualification requirements.

HUD guidelines on debt-to-income ratios will allow debt-to-income ratios up to 56.9% DTI for borrowers with credit scores of 620 or higher.

However, if your credit scores fall below 620 credit scores, then HUD requires that the maximum debt-to-income ratios allowed for borrowers cannot exceed 43% DTI. Lenders who have overlays on credit scores may require that any Borrowers with credit scores under 640 credit scores have verification of rent. In the following paragraphs, we will cover an overview of what lender overlays are and how they can impact you.

What Are Lender Overlays

“Lender overlays” are additional guidelines or requirements imposed by individual mortgage lenders on top of the standard loan requirements set by government-backed entities like Fannie Mae, Freddie Mac, FHA, VA, and USDA. These overlays can make it more difficult for some borrowers to qualify for a mortgage.  Lender overlays are extra criteria or stricter standards that lenders apply when evaluating a mortgage application. These can include higher credit score requirements, lower debt-to-income ratios, additional documentation, and more. Lenders impose overlays to mitigate risk. By setting higher standards, they aim to reduce the likelihood of borrower default and protect their investment.  Click here to get a mortgae loan without lender overlay

How Lender Overlays Impact Borrowers

1. Qualification Difficulty:
   • Overlays can make it harder for some borrowers to qualify for a mortgage, especially if they have borderline credit scores, higher debt levels, or other financial issues.
2. Shopping Around:
   • Because overlays vary by lender, a borrower whom one lender denies might still qualify with another that adheres strictly to the government-backed loan program’s standards without additional overlays.
3. Loan Costs:
   • Stricter overlays can sometimes lead to higher costs through higher interest rates or additional fees as lenders compensate for perceived increased risk.

Strategies for Dealing with Lender Overlays

Improve your credit score, reduce debt, and increase your savings to meet stricter overlay requirements. Since lender overlays vary, applying with multiple lenders is important to find one whose overlays you can meet. This increases your chances of getting approved. A mortgage broker can help you navigate different lenders and find one with the most favorable terms for your situation.

Getting pre-approved with multiple lenders can give you a clear idea of where you stand and help you identify lenders with more lenient overlays.

Lender overlays are additional requirements set by lenders to manage risk, and they can significantly impact your ability to qualify for a mortgage. Understanding these overlays and improving your financial situation can increase your chances of securing a mortgage that meets your needs. Lenders may have stricter guidelines regarding the condition, location, or type of property being financed.

Typical Lender Overlays 

Many lenders who require Borrower with credit scores of under 640 FICO, rental verification is required as part of their lender overlays: Rental Verification is only valid when a renter can provide the mortgage lender 12 months of canceled checks that he or she has paid to their landlord and cannot be late. Paying cash for rental payments and getting a paid cash receipt by the landlord will not be valid for verification of rent purposes. However, if the renter has been renting from a property management company that is a registered property management company, the property management property manager can complete the verification of rent form provided by the lender. The VOR can be used in lieu of providing 12 months canceled the check and/or 12 months bank statements.

Lender Overlays on Credit Score

Mortgage agency guidelines normally require a minimum credit score. However, lenders will have lender overlays on credit scores. While an FHA loan might have a minimum credit score requirement of 580, a lender might require a score of 620 or higher. 

Lender Overlays on Debt-to-Income (DTI) Ratios

The standard DTI ratio limit for many government-backed loans might be around 43-50%, but a lender might impose an overlay requiring a lower DTI ratio, such as 40%. Lenders might require a longer period of steady employment than the minimum set by the loan program. Some lenders might require borrowers to have more months of cash reserves (money saved) than the standard guidelines.

What is Verification of Rent

Overlays on credit scores like lenders requiring verification of rent if their credit scores are under 640 credit scores create a major problem for homebuyers who cannot provide verification of rent: This is because they have been living rent-free with a family trying to save up money for the down payment of their home purchase. The great news is that if you are a home buyer with under 640 credit scores, you just need to look for a lender like Gustan Cho Associates who has no overlays on credit scores. We also have no other overlays on FHA Loans.  Get approvable for FHA  loans with no other overlay

Automated Underwriting System Findings

Another major factor with credit scores is that many times, the Automated Underwriting System will require verification of rent for Borrowers with credit scores of under 620 FICO. This creates major problems for homebuyers who cannot provide verification of rent due to not making their rental payments with a check or homebuyers who cannot provide rental verification. This is because they do not rent and were living rent-free with family, relatives, or friends

When a borrower with under 620 credit scores is required to provide verification of rent by the automated findings, the loan officer can help the Borrower to boost their credit scores to 620 FICO or higher.

There are several tricks of the trade helping a borrower to boost up their credit scores. Examples include paying down tradelines such as paying down their credit card balances. Or adding themselves as an authorized user to a credit card of a family member who has credit cards with perfect payment history and low credit card balances. Or by improving their credit scores by getting several secured credit cards. If you are a mortgage loan borrower and need a mortgage lender with no lender overlays, please contact me at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. The Team at Gustan Cho Associates are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.