When consumers begin the task of shopping for a home loan they can soon find out that it can sometimes be a rather confusing process. The mortgage industry has its own internal language that is rarely used outside of the real estate industry. Unless someone is in the business loan terms can be thrown around with the assumption the borrowers “speak the language” which can lead to confusion and miscommunication. As consumers shop for a mortgage, they’re in the early stages and if they’re not aware of how mortgage loans are issued and the guidelines that must be followed they might end up with a lender that’s not up to the standards of other mortgage lenders. USA Mortgage is one of the no overlay lenders which means, we go with HUD guidelines when getting approved for an FHA or VA loan. Chase or other banks they require having FICO at least at 620 or 640 score which many people don’t have.
There are distinct differences regarding the different places someone can go to get a mortgage loan and the ideal choice is working with a direct lender that specializes in making mortgages. What is a direct lender? A direct lender is an entity that has the sole authority of making the final lending decision on each and every loan application submitted.
For example, consider a mortgage broker. A mortgage broker is an individual or company that originates and finds a home loan. The broker has marketing agreements with businesses known as “wholesale” lenders who pay the broker a fee for finding mortgage loans for them. The broker takes a loan application from a potential buyer but the broker does not approve the loan but instead forwards the loan application to the wholesale lender. The wholesale lender can be considered as a “indirect” lender as the application was originated by an outside party, in this case the mortgage broker. The mortgage broker has no decision-making authority on the loan and the borrowers are introduced to a new company they know nothing about. They might have thought they applied for a mortgage with the broker but the mortgage comes from another party.
The lender has the responsibility of making sure the submitted loan file meets the guidelines of the selected home loan program. There are two primary types of mortgages, conventional and government-backed. Conventional loans are those underwritten to guidelines set by Fannie Mae and Freddie Mac and are the most common loans in today’s marketplace. Fannie and Freddie both issue guidelines that lenders must follow in order for an approved loan to be eligible for sale in secondary markets. Government-backed loans are those following VA, FHA and USDA guidelines and follow much the same process as conventional approvals. VA, FHA and USDA also issue their own internal guidelines that lenders must follow.
For example, let’s say a borrower has a credit score of 620 and a down payment of 20 percent. Gross monthly income comes in at $5,000 per month. The lending guidelines require that debt to income ratios be 33 and 41. 33 percent of gross monthly income is allotted to the house payment which includes the principal and interest payment, property taxes and insurance. Other monthly credit obligations such as a car payment and student loan payment should not exceed 41 percent of gross monthly income. The loan application is submitted and approved by the lender and the loan is ultimately sold to Fannie Mae as the loan file met all of Fannie Mae’s loan guidelines.
But what if an individual lender decided to add some of its own guidelines on top of what Fannie Mae already requires? What if for example the lender required a credit score of 640 instead of the 620 that Fannie needs? In this example, the loan would not meet the lender’s standards and would be turned down. The potential homeowner could then decide they needed to improve their credit scores before starting another home search. But what really happened is they applied with a lender that added additional guidelines in order to be approved. These additional requirements are called overlays.
A mortgage company can add an overlay but it cannot remove guidelines established by Fannie, Freddie or any of the government-backed programs.
A direct lender can make loans more difficult to qualify for when adding additional guidelines. While they certainly have every right to do so by adding overlays fewer borrowers will be approved. Someone can apply for a mortgage loan at one mortgage company and get approved while someone else can apply for the very same loan at another mortgage company and get turned down because of additional requirements that ‘s why it’s it’s beneficial to work with no overlay lenders.
A direct lender however not only has the authority to make the final lending decision it can also issue its own set of overlays. But it can also decide not to issue any overlays whatsoever. In an ideal situation, a borrower will work with a direct lender that does not have any overlays. The applicant works directly with the entity making the lending decision without having to jump through additional underwriting hoops in order to be approved. Lenders can add these additional qualifying requirements as they wish as long as those requirements are applied universally to all applications.
When working with loan officer that works with a direct lender the applicant has an advantage compared to applicants that work with a loan officer where the company is not a direct lender and applies with a third party, not with the entity that makes the final lending decision. For example, when a loan is submitted to my company and there needs to be an exception made, we have the ability to make the exception. We don’t have to rely on yet another third party to issue a final approval. For example, let’s say an FHA loan application has a credit score of 575 when the minimum suggested score is 580. Because we are the direct lender and are FHA approved, we have the ability to still approve the loan with a credit score of 575 and the loan will still be eligible for sale in the secondary market. This is the power of no overlay lenders.
When lenders apply their own internal rules consumers can mistakenly think the additional overlays are universal, that all conventional loans have such requirements when the fact is it’s the individual lender that is making the loan more difficult to qualify for. Another lender may full well approve the very same loan because it does not have any overlays.
Consumers aren’t going to be aware of the term “overlay” much less which lenders have them and which do not. It’s an industry term that mortgage companies use. Consumers aren’t going to start shopping for a mortgage and ask each individual no overlay lenders if there are any additional rules for a specific home loan program. Instead, the loan officer will prequalify the applicant over the phone and during this prequalification process, the loan officer can inform the applicant they can’t get an approval for the loan they want based upon an overlay. However, working with me and my company, that’s not going to be an issue.
If you have been turned down for a home loan from no overlay lenders, or if you have any questions about real estate or mortgage please contact Loan Consultants at 844-275-2007. Just give us a call or text and we will be happy to assist you.