If you haven’t already, please check out my article on mortgage lender overlays, where it goes into detail about exactly what a lender overlay is and how it relates to you the borrower in terms of getting approved for a loan. In short, a lender overlay is an additional requirement by a mortgage lender that is above and beyond the minimum requirements of a specific loan program. For example, if you are going for a conventional loan where you know the minimum FICO credit score is 620, but the lender wants a minimum of 650 FICO, this is a lender overlay. Or if you are going for an FHA loan after foreclosure where the mandatory waiting period is 4 years, and the lender wants to enforce 5 or 6 years, this would also be an example of a lender overlay. In these examples, the lenders are making you qualify for more requirements than the minimum requirements for the specific loan program. We will go over Common Lender Overlays in the subsequent sections.
As mentioned earlier, one of the Common Lender Overlays is the credit score, which at its core is the initial requirement that most potential borrowers research before looking to get approved for a loan. Knowing if you are dealing with lenders who have overlays is key to knowing if you will get approved or denied by a lender. As we went into earlier, FHA minimum credit score guidelines require you to have a 580 FICO if you would like to obtain a 3.5% down payment mortgage. Also, if you have 500-579 FICO credit scores, you can also get approved but will need 10% down payment. Even though FHA only requires a 580 FICO, most mortgage lenders out there will only require you to have a 620-640+ FICO credit score. The reason this occurs is that these increased requirements gives the lender less risk involved with taking you on as a borrower. If you have run into trouble in the past and were told you didn’t qualify for a loan even though you have the minimum FICO credit score requirements, then you need to reach out to me as I don’t have any lender overlays and can get your loan approved with the minimum loan program requirements. You can reach me at 888-900-1020 or email me directly at firstname.lastname@example.org.
Another of the Common Lender Overlays is the debt to income ratio. As always, we will start with the most popular loan program and that is an FHA loan. If you have a minimum of 620 FICO credit score, you can have a backend debt to income ratio of 56.9% which means that your monthly debt obligations can be 56.9% of your monthly gross income and you will be approved for a loan. If your credit score is under 620 FICO, then you can have a backend debt to income ratio of 43%. Given this, you can find yourself going to a lot of FHA lenders who will require a debt to income ratio of 45% even if your score is above the 620 FICO minimum. What these lenders are doing is minimizing their risk by having one of the Common Lender Overlays.
The final Common Lender Overlays we will touch on is how banks treat bankruptcy. You might have gone through a tough time and had to declare Chapter 7 Bankruptcy, and the FHA Loan Program is very lenient and will allow you to rent again after a mandatory waiting period of 2 years. However, you will find that a lot of lenders will want you to wait for 3-5 years before they will approve you for a loan. This is due to the fact they want to see you further removed from the event and show more credit worthiness in your recent history. With regards to Chapter 13 Bankruptcy, FHA states that you can get a loan the day after your discharge date, but as stated before, other lenders might want you to wait 1-2 years after this before they will lend to you. This is just another Common Lender Overlays used to make borrowers jump through more hoops to get approved for a loan.
If you have run into lenders who have put lender overlays in place to increase the requirements needed to get a loan, then you need to reach out to me at Loan Consultants and you can be assured that I can get you into a program that lends just to the minimum requirements. Reach out to me at anytime by calling 888-900-1020, emailing email@example.com, or inquire through my website www.loanconsultants.org.
Gustan Cho Associates
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