What Are Lender Overlays on FHA, VA, and Conventional Loans

This blog will discuss and cover lender overlays versus agency guidelines on home loans. All mortgage lenders need to meet agency mortgage guidelines. Agency guidelines are those from HUD, VA, USDA, Fannie Mae, and Freddie Mac. However, mortgage lenders can have guidelines that surpass agency lending guidelines.

Additional lending requirements above and beyond of agency guidelines are called lender overlays. Most homebuyers think that all lenders have the same lending requirements when it comes to FHA, VA, USDA, and Conventional loans. This is not the case.

Every lender can have different mortgage guidelines on government and conventional loans. All lenders do need to meet agency guidelines. However, lenders can have overlays. One lender can have overlays on credit scores and not debt-to-income ratios. Another lender may have overlays on DTI but not credit scores. Not all lenders are created equal. Mortgage Lenders For Bad Credit is one of the very few mortgage companies with no lender overlays on government and conventional loans.

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Denied By Lender Due To Lender Overlays Versus Agency Guidelines

Home buyers often do their research when trying to qualify for a home loan. They research HUD agency mortgage guidelines and find they meet the agency guidelines for FHA loans. Borrowers find out they meet the 580 credit score requirements to qualify for a 3.5% down payment FHA Loan. Marga Jurilla, the National Operations Manager at Mortgage Lenders For Bad Credit, explains lender overlays:

Not all mortgage lenders have the same lending requirements on FHA, VA, USDA, and Conventional loans. All mortgage lenders need to meet the minimum agency guidelines on FHA, VA, USDA, and conventional loans. However, each lender can have higher lending requirement higher than the minimum required by HUD, VA, USDA, Fannie Mae, and Freddie Mac. These higher lending requirements are called lender overlays.

Some homebuyers do not have the 3.5% down payment, but they understand that HUD allows a family member to gift them the down payment. Their parents are willing to gift them the down payment. They have older outstanding collections and charged-off accounts but have been timely with all their payments in the past 12 months. They find out that FHA does not require them to pay outstanding or charged-off accounts. These folks are excited and take a day off from work so the couple can visit a loan officer at their local bank. They become stressed after the loan officer at their local bank tells them they do not qualify for an FHA loan.

Why Borrowers Do Not Qualify At Lenders With Overlays

The reason they do not qualify is due to the following reason:

The minimum credit score to qualify for FHA Loans is 640 at the bank
These folks have a 580 credit score
All collections and charged-off accounts must be paid in full and seasoned for two years after it has been paid.
The above is not a HUD guideline but the bank’s overlay on collections/charge offs
The loan officer at the bank told the couple that they could not have gifted funds for a down payment.
Again, HUD does allow gift funds for the down payment
However, many lenders and banks may not accept gifted funds as part of their overlay

The above case is a typical scenario of our borrowers at Mortgage Lenders For Bad Credit. Over 80% of our borrowers could not qualify at other lenders due to their overlays. Luckily, Mortgage Lenders For Bad Credit has zero overlays on government and conventional loans. Unfortunately, many borrowers give up after being denied by a lender with overlays. Most of our borrowers at Mortgage Lenders For Bad Credit are tenacious and do not give up. After their loan denial, they do their due diligence and find us online or through our national referral network.

Typical Lender Overlays Versus Agency Guidelines

Listed below are specific lender overlays versus agency guidelines imposed by many lenders, Requiring higher credit scores than the minimum agency guidelines. Lower debt-to-income ratio requirements than agency guidelines. Many lenders will not allow manual underwriting on VA and FHA loans.

A common lender overlay by mortgage companies is to have borrowers pay outstanding collections and charge off accounts when the agency guidelines do not require them. Lenders can impose overlays for longer waiting periods after housing events or bankruptcy than agency guidelines.

Many lenders do not gift funds unless borrowers have a certain credit score. They are not allowing co-borrowers unless borrowers have a certain credit score—higher credit standards on two to four-unit properties and condominiums. Overdrafts in bank statements are allowed, but lenders can have overlays not allowing bank overdrafts. Lenders can require verification of rent even though AUS does not condition it. They require borrowers to have reserves even though AUS does not condition them.

Lender Overlays Versus Agency Guidelines On VA Loans

The U.S. Department of Veterans Affairs has no minimum credit score requirements. The VA does not have a maximum cap on debt-to-income ratios. Mortgage Lenders For Bad Credit has approved and closed countless borrowers on VA loans with credit scores in the 500s and 60% debt-to-income ratios. However, most lenders have overlays on VA loans. This section will discuss typical lender overlays versus Agency guidelines on VA loans.

It is highly recommended borrowers know the basic agency mortgage guidelines before they consult with a loan officer. The reason why understanding the basic guidelines is important is in the event if the loan officer tells them they do not qualify, they know they meet the guidelines and the lender have overlays.

Require minimum credit scores of 620 or higher when the VA does not have minimum credit score requirements—having a maximum debt-to-income ratio when the VA does not have a debt-to-income ratio cap. They are not allowing manual underwriting. Lenders with overlays are not accepting borrowers in an active Chapter 13 Bankruptcy Repayment Plan after 12 monthly payments to Trustee. Many lenders require a two-year waiting period after the Chapter 13 Bankruptcy discharge date when VA has no waiting period requirements.

Reason Why Lenders Have Mortgage Overlays

The main reason why lenders have overlays on government and conventional loan programs is to reduce layers of risk. Lenders believe those agency guidelines are too lax and believe they should have tougher lending requirements. They are allowed to do so.

Mortgage Lenders For Bad Credit have a different business model. As long as borrowers meet minimum agency guidelines, we should approve and close their home loans. Not too many lenders have a no lender overlay business model.

For borrowers needing a lender with no overlays, don’t hesitate to contact Mortgage Lenders For Bad Credit at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Our licensed and support personnel team is available seven days a week, evenings, weekends, and holidays.