What Are Lender Overlays vs Agency Guidelines
In this blog, we will cover and discuss what are lender overlays vs agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac. One frequently asked question by our viewers and borrowers is what are lender overlays vs agency guidelines? Agency Mortgage Guidelines are the minimum lending guidelines imposed by FHA, VA, USDA, FANNIE MAE, and FREDDIE MAC. We will be covering what are lender overlays vs agency guidelines and why lenders impose overlays on government and conventional loans.
All lenders need to adhere to the minimum agency mortgage guidelines on government and/or conventional loans. However, it is not illegal for a lender to have higher lending standards, called overlays, that is higher than the minimum guidelines. What we mean by mortgage agency guidelines are guidelines set by HUD, VA, USDA, Fannie Mae and Freddie Mac. In the following paragraphs, we will cover lender overlays vs agency guidelines.
Do Lenders Have Different Guidelines on the Same Mortgage Program?
Mortgage lenders can have higher lending guidelines that are above and beyond the minimum agency mortgage guidelines which are called lender overlays. It is not illegal for lenders to have tough lender overlays. Due to lender overlays, not all lenders have the same lending requirements on FHA, VA, USDA, and conventional loans. If you get denied for a mortgage from one lender due to overlays by the lender, you can get approved for a mortgage with a different lender with no overlays.
Lender Overlays vs Agency Guidelines?
We get many calls from our viewers asking what are lender overlays vs agency guidelines imposed by lenders. Many people do not know what lender overlays vs agency guidelines are. A large number of homebuyers fell just because they do not qualify for a government-backed loan by a bank, they cannot qualify for a government loan anywhere. When it comes to mortgage guidelines, there are two types of mortgage lending requirements. The first type of guidelines is the minimum Mortgage Guidelines from Loan Programs (FHA, VA, USDA, FANNIE, FREDDIE). In the next section, we will cover and discuss what are lender overlays vs agency guidelines by individual mortgage companies. Click Here to apply for a mortgage with GCA Loan Officers
What Are Lender Overlays vs Agency Guidelines From Mortgage Companies?
In this paragraph, we will cover what are lender overlays imposed by lenders. The second type of mortgage guidelines is separate lending guidelines mandated by each individual lender These are called lender overlays. Most mortgage lenders have overlays on government and conventional loan programs. GCA Forums is one of the very few mortgage lenders with a no-lender overlays foundation. In the following paragraphs, we will cover and discuss what overlays are as well as common lender overlays imposed by lenders.
What Are Lender Overlays vs Agency Guidelines and How Does It Work?
What are lender overlays imposed by mortgage lenders? Every lender can have their own lender overlays when it comes to what type of borrower they want. Not all lenders have the same mortgage lender overlays. Overlays are additional guidelines. There are two types of mortgage lending criteria:
- The first is government and conventional loan minimum requirements
- The second is mortgage company overlays
Do All Lenders Follow The Same Mortgage Guidelines?
Just because borrower meets the bare minimum FHA, VA, USDA, Fannie Mae, and/or Freddie Mac lending guidelines does not mean that they are guaranteed a home loan. For example, minimum agency credit score requirements are 580 FICO for 3.5% down payment FHA Loans under HUD Guidelines. However, most mortgage companies may require higher credit scores. This holds true even though HUD only requires 580.
Lenders can have a right to have higher mortgage lending requirements. Most lenders have their own minimum credit score requirements which override FHA’s minimum standards which are called overlays. There are lenders like GCA Forums Mortgage Group who have no overlays. We just go off the minimum government and conventional loan guidelines. Click Here to apply for FHA, VA, USDA loans
Typical Common Overlays Imposed By Lenders
Lenders can have overlays on just about anything. Not all lenders have the same lender overlays. Here is an example of common lender overlays:
- HUD Guidelines On Credit Scores on 3.5% down payment FHA Loans is 580 FICO
- Just because HUD Guidelines On Credit Scores is 580 does not mean that all lenders need to abide by the 580 credit scores
- Lenders do have to meet the 580 FICO in order for HUD to insure the FHA Loan
- But they can also require higher credit scores
- Many lenders have their own overlays
- Most mortgage company’s overlays on minimum credit scores for FHA mortgage loans are 620 FICO
- Most banks require 640 FICO
- However, there are lenders that will have their own overlays on credit scores
- 600 FICO scores might be a minimum for one lender while some may have it at 620 FICO
GCA Forums Mortgage Group has no overlays on government and conventional loans.
Debt To Income Ratio Lender Overlays vs Agency Guidelines
Another example of overlays are debt to income ratio. The maximum debt to income ratio allowed for an FHA Loan is 46.9% front-end DTI and a maximum back-end DTI of 56.9% in order to get an approve/eligible per Automated Underwriting System (AUS) approval. There are lenders who will not institute an overlay when it comes to debt-to-income ratio limits. However many lenders will have their own overlays when it comes to debt-to-income ratios. The majority of lenders have debt-to-income ratio overlays set at 50% while others are stricter.
Lender Overlays vs Agency Guidelines on Credit Tradelines
Other overlays include minimum credit tradelines. Credit tradelines are credit accounts borrowers have established for a period of at least one year and report to the credit bureaus. Most lenders have minimum credit tradeline requirements as part of their lender overlays. Common overlays on credit tradelines is requiring 3 credit tradelines seasoned for at least a year. Others will take into account non-traditional credit such as rent verification, utilities, cell phones, and cable television payment history as credit line tradelines as long as it can be proven by canceled checks. Having credit tradelines is not required on any home mortgage program. Minimum credit tradelines requirements are lender overlays set by individual mortgage lenders.
Mortgage Loan Denied Because of Overlays
Borrowers who have been denied by lenders because of lender overlays, no worries. There are hundreds of lenders with different overlays requirement. There are many lenders with no overlays. Borrowers should be able to find the right lender. In the event mortgage applicants do not qualify with a particular lender, they can qualify with another lender.
After reading this blog, hopefully, you have a full understanding of what are lender overlays vs agency guidelines is.
Starting The Mortgage Process With a Lender With No Overlays
Homebuyers who need to qualify for FHA, VA, USDA, and conventional loans with a lender with no overlays on government and conventional loans, please contact us at GCA Forums Mortgage Group at 1-262-716-8151. Or text us for a faster response. Or email us at gcho@gustancho.com. Besides having a national reputation of being a no lender overlays mortgage broker, the team at GCA Forums Mortgage Group are experts in originating and funding non-QM loans and alternative loan programs. The team at GCA Forums Mortgage Group is available 7 days a week, on evenings, weekends, and holidays.
Lenders Requiring Verification Of Rent
Mortgage Loan Applicant applying for a new purchase or refinance mortgage loans, the lender may require mortgage lenders require verification of rent. There are two ways that the Verification of Rent is required:
- The Automated Underwriting System (AUS) may require VOR as part of the Automated Findings
- Mortgage Lender may require it as an overlay
All manual underwriting requires Verification of Rent (VOR). In this article, we will discuss and cover when lenders require rental verification by borrowers.
Mortgage Process
Risk Assessment is what determines a borrower’s loan approval. Mortgage Underwriters need to determine whether the borrower has the ability to re-pay their new mortgage. Lenders will determine whether to approve a borrower for a new mortgage loan by analyzing the borrower’s income, debt, assets, and credit score
- There are minimum mortgage guidelines on credit score
- Plus lenders can have their own overlays
- Lenders have cutoff minimum credit scores as part of their overlays on credit scores
- Most lenders want a minimum of a 640 credit score
- Other lenders have lower credit score requirements
- Cutoff limits are set at 680 FICO, 640, 620, 600, 580, and 530 FICO.
- The lower consumer credit scores are, the more mortgage guidelines that will apply
- Verification of rent can be one of the conditions on AUS
There are many instances where AUS will condition VOR for mortgage applicants with credit scores below 620 FICO.
When Do Lenders Require VOR?
The probability is high that AUS will request VOR for borrowers with credit scores below 620, Verification of rent can be requested by the mortgage underwriter even if not requested by AUS.
- Verification of rent is proof that the mortgage applicant is currently paying rent and have done so in the past year
- A rental receipt is not good enough for proving verification of rent
- Verification of rent, also known as VOR, is proven by supplying a 12-month history of canceled bank checks and/or 12 months bank statements
Renters who are paying cash to the landlord and getting a monthly receipt cannot be accepted as proof of verification of rent.
Renting From Property Management Company
Another option instead of canceled checks that verification of rent will be valid is if the landlord is a property management company.
- A written letter verifying rent for the past year from a property management company will be a valid verification of rent
- This holds true even though the renter has paid them in cash
- For those folks who are intending in buying a new home, make sure to pay monthly rental payments with a check
- There are enough obstacles to overcome in the mortgage application process and verification of rent is one of them
It is a shame to be paying rental payments on time with cash and not getting credit for verification of rent.
Lenders Overlays vs Agency Guidelines Requiring Rental Verification
If mortgage lender requests verification of rent, it must be provided.
- They will make exceptions if borrowers do not have verification of rent
- But there will be certain guidelines and restrictions on the terms of the loan
- The mortgage process cannot proceed further if borrowers do not have verification of rent and VOR is requested
- All manual underwrites require VOR
- Low payment shock is considered a compensating factor
An increase of up to 5% from rent to mortgage payment or $100 whichever is lesser is considered low payment shock and compensating factor.
This guide on lender overlays vs agency guidelines was updated on November 11th, 2024.
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