Mortgage Lender Overlays Versus Agency Guidelines

In this blog, we will cover and discuss mortgage lender overlays versus agency guidelines. We will also answer the frequently asked questions of how does mortgage lender overlays versus agency guidelines affect mortgage loan approval. Mortgage Lender Overlays are mortgage qualification requirements that a lender implements on top of the minimum mortgage guidelines by FHA, USDA, VA, FANNIE MAE, and FREDDIE MAC. There are two types of guidelines:

1. Minimum federal mortgage guidelines
2. Mortgage Lender Overlays

Agency Guidelines Versus Mortgage Lender Overlays

All lenders need to meet federal mortgage guidelines. However, every lender can have their own mortgage lender overlays where the lending requirements are higher, above, and beyond those of federal mortgage guidelines. This is the reason why some lenders will only accept borrowers with 620 to 640 credit scores when FHA Guidelines only require a 580 credit score.

Common Lender Overlays

Many lenders require borrowers to pay off outstanding collections and charged-off accounts when other lenders like myself do not. FHA does not require borrowers to pay outstanding collections and charged-off accounts to qualify for FHA loans. Bottom line is that just because a borrower cannot get qualified with one lender does not mean they cannot qualify with another lender.

Types Of Mortgage Lender Overlays By Lenders

Every lender can set their own overlays on the following:

• Credit Scores
• Debt To Income Ratios
• Collection Accounts
• Charge Off Accounts
• Waiting Period After Chapter 13 Bankruptcy Discharged Date
• Credit Tradelines
• Late Payments

There are lenders that do not have any overlays. Gustan Cho Associates has zero lender overlays on government and conventional loans. We will just off the federal minimum lending guidelines on the particular loan program. For borrowers with prior bad credit such as a bankruptcy, foreclosure, deed in lieu of foreclosure, and/or short sale, there are certain mandatory requirements borrowers need to meet in order to qualify for a mortgage loan.

Waiting Period After Bankruptcy

There are waiting periods after bankruptcies to qualify for a mortgage. The waiting period after bankruptcy depends on the type of bankruptcy and on the type of mortgage loan program. Borrowers who filed Chapter 7 bankruptcy, there is a mandatory 2 year waiting period from the discharge date of bankruptcy in order to qualify for an FHA, VA and 3 year wait period on USDA loans. Borrowers who filed Chapter 13 Bankruptcy can qualify for VA and FHA loans one year in Chapter 13 with Trustee approval. There is no waiting period to qualify for a Chapter 13 Bankruptcy after the discharged date of the Chapter 13 Bankruptcy discharged date to qualify for FHA and VA loans.

Mortgage After Bankruptcy

Conventional loan waiting period requires a 4 year waiting period after the discharged date of the Chapter 7 Bankruptcy. There is a two-year waiting period to qualify for a Conventional loan after Chapter 13 discharged date. For borrowers with mortgages as part of Chapter 7 Bankruptcy, there is a four-year waiting period to qualify for a Conventional loan from the discharged date of the Chapter 7 Bankruptcy. This is the case even though the foreclosure, deed in lieu, short sale was recorded after Chapter 7 discharged date. There is a two-year waiting period to qualify for a VA loan after a Chapter 7 Bankruptcy. VA loans have the same waiting period requirements as FHA with regards to Chapter 13 Bankruptcy where borrowers can qualify for a VA loan one year in Chapter 13 Bankruptcy Repayment Plan and no waiting period after a Chapter 13 Bankruptcy discharged date.

Waiting Period After Foreclosure and Short Sale

Home Buyers with prior foreclosure and short sale can qualify for mortgages. Here are the guidelines for qualifying for mortgage loans after foreclosure and short sale. There is a mandatory 3 year waiting period after a foreclosure, deed in lieu of foreclosure, and/or short sale to qualify for FHA and USDA loans. The waiting clock starts from the actual recorded date of the foreclosure, deed in lieu of foreclosure, or short sale and not the date that you turned in keys to the mortgage lender.

Fannie Mae and Freddie Mac Guidelines on Conventional Loans After Bankruptcy

For conventional loans, the waiting period to qualify for a conventional loan after a foreclosure is 7 years from the recorded date of the foreclosure. There is a four-year waiting period after a deed in lieu of foreclosure and short sale to qualify for conventional loans. For borrowers with mortgages or mortgages part of Chapter 7 Bankruptcy, there is a four-year waiting period to qualify for a Conventional loan from the discharge date of your Chapter 7 discharge date. This is the case even though the foreclosure or sheriff’s sale was recorded after the discharged date of your Chapter 7. However, the foreclosure and/or housing event needs to be finalized

Minimum Credit Score To Qualify For FHA Loan

The minimum credit score required to qualify for an FHA mortgage loan with a 3.5% down payment is 580. Most lenders have overlays with credit scores where they may require a 620 credit score for FHA borrowers even though FHA only requires a 580. Borrowers with credit scores between 500 and 579 need to have a 10% down payment and an approve/eligible per Automated Underwriting System Findings Approval. Open collections and charge-off accounts do not need to be paid and are allowed for FHA mortgage loans. But again, it depends on the individual mortgage lender’s own internal overlays. Many lenders have overlays on collections and charge offs where they require it to be paid where FHA does not require it to be satisfied. Gustan Cho Associates has no mortgage lender overlays

Minimum Credit Score To Qualify For Conventional Loan

The minimum credit score to qualify for a conventional loan is 620. Again, many lenders have overlays on minimum credit scores on Conventional Loans where they will require higher than 620 credit scores for conventional borrowers.

Mortgage Lender Overlays

Just because borrowers have paid their dues and meet the minimum lending guidelines on a particular loan program does not mean they will qualify for a mortgage with all lenders. Borrowers need to hire a mortgage lender that has no overlays on the type of credit issues they have. Gustan Cho Associates is a mortgage company licensed in multiple states specializing in helping borrowers with less than perfect credit with no overlays on FHA, VA, USDA, and Conventional loans. The majority of lenders in this country have their own overlays. Again mortgage lender overlays are additional requirements other than FHA, VA, USDA and/or Fannie Mae’s minimum lending requirements.

Typical Lender Overlays

For example, the bare minimum FHA required credit score guidelines are a 580. However, many FHA insured lenders have minimum credit score overlays such as 600, 620, 640, 660, or 680. Other mortgage lender overlays may be a minimum of 3 credit trade lines for at least 12 to 24 months. Credit trade lines are credit lines such as auto payments, credit cards, and other types of installment, or revolving credit lines. There are mortgage lenders who have a minimum of 4 credit trade lines that have been seasoned for at least a year. Credit Tradelines are not agency guidelines required but are overlays by individual lenders.

Verification Of Rent

Other examples of mortgage lender overlays are that the borrower needs verification of rent for a least a year. The only acceptable means of verification of rent is by providing the mortgage loan underwriter proof of canceled checks for the past 12 previous months. A cash rent payment will disqualify verification of rent.   Some lenders may accept a letter from a registered property management company. Individual landlords’ written receipts or letters are not accepted. Verification Of Rent is normally not required unless it is conditioned on the Automated Underwriting System. Many lenders do require verification of rent as part of their overlays and not because AUS requires it.

Overdrafts In Bank Statements

Other examples of mortgage lender overlays are no overdrafts in any of the mortgage loan bank statements for the previous 12 months. One $5 dollar overdraft can be a cause of a mortgage loan denial letter. Any late payments, collections, charge offs, or derogatory credit after a bankruptcy and/or foreclosure can be a cause for a mortgage loan denial. Majority of lenders do not want to see a late payment after a bankruptcy and/or foreclosure no matter how long the bankruptcy and/or foreclosure is. Any late payments in the past 12 months prior to applying for a mortgage loan are frowned upon and could affect loan approval. One or two late payments in the past 12 months is not a deal killer. But the borrower would need a strong letter of explanation.

If Denied By A Lender

Borrowers are denied by a lender due to the mortgage lender’s overlays, no need to worry. There is no reason why a pre-approved borrower should get a last-minute mortgage loan denial or go through a stressful loan process. The only reason for this to happen is because the loan officer did not properly qualify the borrower. Borrowers should not have gotten a pre-approval if they did not meet the minimum lending guidelines required by FHA, VA, USDA, FANNIE MAE, FREDDIE MAC.  Borrowers denied for a mortgage loan because they have not met the guidelines of FHA and/or Fannie Mae, there is a reason to worry. However, most mortgage lenders will not process mortgage applications if borrowers do not meet FHA and/or Fannie Mae’s guidelines. Gustan Cho Associates closes 100% of all of their pre-approvals. Gustan Cho Associates does not have any overlays on government and Conventional Loans.

Home Loan With Bad Credit

Borrowers with prior bad credit such as the following:

• Outstanding Collections and Charge Offs
• Late Payments
• Bankruptcy
• Foreclosure
• Deed in lieu of foreclosure
• Short sale
• Judgments
• Tax Liens

If the above situations apply, the best bet is to hire a lender who has no overlays. Borrowers denied a residential mortgage loan or are told they do not qualify for a mortgage due to overlays, contact us

Update To This Blog On Conventional Loans

Here are recent updates on mortgage guidelines for 2022:

• The 2 years waiting period after a deed in lieu of foreclosure and short sale with a 20% down payment on a conventional loan is no longer in effect as of August 2014
• To qualify for a conventional loan after a short sale and/or deed in lieu of foreclosure requires a 4-year waiting period
• The new waiting period to qualify for a conventional loan after a deed in lieu of foreclosure and/or short sale is 4 years with 5% down payment
• Home Buyers who have not owned a home in the past three years are considered first time home buyers and can qualify as a first time home buyer and can put a 3% down payment on a home purchase
• Another new rule and regulation that was enacted is for borrowers with mortgage part of bankruptcy, the waiting period to qualify for a conventional loan starts from the discharge date of Chapter 7 bankruptcy and not the recorded date of foreclosure or sheriff’s sale
• This is great news for those who had their foreclosures recorded at a later date after the bankruptcy and had their mortgage part of their Chapter 7 Bankruptcy
• However, the foreclosure needs to have been finalized

Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans. Gustan Cho Associates also has the ability to broker non-QM and alternative mortgages such as non-QM loans one day out of bankruptcy and/or foreclosure, non-doc mortgages, asset depletion, fix and flip loans, and bank statement loans for self-employed borrowers.