Agency Guidelines Versus Lender Overlays On Home Mortgages

by Mike Gracz

This Article Is On Agency Guidelines Versus Lender Overlays On Home Mortgages

The two most popular home mortgage program in the U.S. are government and conventional loans. There are three different types of government loans:

  1. FHA Loans
  2. VA Loans
  3. USDA Loans

Government loans are for owner-occupant primary home financing only. Private lenders originate, process, underwrite, and fund government loans. The three government agencies will insure and partially guarantee the loss incurred by lenders in the event borrowers default and/or foreclose on government loans. However, in order for FHA, VA, USDA to partially guarantee and insure lenders insure lenders, the lender need to make sure each government loan meets the government agency’s minimum guidelines. However, lenders can decide to have higher lending requirements on government loans called lender overlays. It is totally legal for a lender to require a higher lending standard that is above and beyond the minimum agency guidelines. For example, to qualify for a 3.5% down payment FHA loan, the borrower needs a 580 credit score. However, most lenders will require a 620 to 660 credit score on FHA loans. This holds true even though HUD only requires a 580 credit score. The higher credit score requirement by the lender is called a lender overlay. Not all lenders have the same lending requirements due to their lender overlays. However, if you do not qualify at one lender due to their lender overlays, you can qualify at a different lender with no lender overlays.
Lenders are allowed to have lender overlays on FHA, VA, USDA loans. Capital Lending Network, Inc. has a national reputation for not having any lender overlays on government and conventional loans.

Agency Guidelines Versus Lender Overlays On Conventional Loans

What are agency guidelines and lender's overlays on conventional loans

Conventional loans are often referred to as conforming loans. Conventional loans are not government loans.
Conventional loans are private loans issued by lenders and does not have the backing of any government agency like FHA, VA, USDA loans. However, lenders need to make sure conventional loans they fund conform to Fannie Mae and/or Freddie Mac Guidelines. Why would lenders need to have the loans they fund conform to Fannie Mae and/or Freddie Mac Guidelines?  Lenders use their warehouse line of credit to originate and fund mortgages for their borrowers. After they fund mortgages to borrowers, lenders need to sell all the mortgages they fund on the secondary market. Fannie Mae and Freddie Mac are the two largest buyers of mortgage in the secondary mortgage bond market. Fannie Mae and Freddie Mac only buy mortgages that conform to their agency guidelines. This is why lenders need to have their borrowers meet the minimum Fannie Mae and/or Freddie Mac agency guidelines on conventional loans.

Importance Of Understanding Lender Overlays For Borrowers With Less Than Perfect Credit

Any borrowers with high credit score, lower debt to income ratio, and perfect payment history with no derogatory credit tradelines can qualify for a mortgage at any financial institution. However, for those with less than perfect credit, lower credit score, higher debt to income ratio, prior bankruptcy and/or a housing event, outstanding collections and/or charged-off accounts may have a tougher time qualifying for a mortgage. It is important for borrowers with less than perfect credit to understand the basic agency guidelines versus lender overlays. This is in the event if a lender tells you that you do not qualify for a mortgage does not mean you cannot qualify for a mortgage at a different lender. Over 97.8% of lenders have lender overlays. Capital Lending Network, Inc. is one of the very few mortgage companies that has no lender overlays on government and conventional loans. As long as you meet the minimum agency guidelines, that is all we go by.
ZERO LENDER OVERLAYS. All lenders require all of their borrowers to meet the minimum agency mortgage guidelines. However, lenders can have higher lending standards that is above and beyond the minimum agency guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac called lender overlays. Lender overlays is the reason why not all lenders have the same mortgage lending requirements on FHA, VA, USDA, and Conventional loans. Lender overlays are additional layers of mortgage lending requirements above and beyond the minimum agency guidelines.

Why Do Lenders Have Lender Overlays?

Why Do Lenders Have Lender Overlays?

Most lenders do not want to take a chance in a borrower defaulting on a mortgage loan. Many lenders believe just going by the minimum agency guidelines is too risky. Therefore, to help manage the layers of risk, add additional lending requirements of their own. Lenders can set any type of lender overlays they want. It is not illegal for lenders to come up with overlays to their level of tolerance. For example, there is no minimum credit score requirements on VA loans with an approve/eligible per automated underwriting system approval. However, most lenders will require a 620 to 640 credit score requirement on VA loans even though the Veterans Administration has no minimum credit score requirement. There is no maximum debt to income ratio caps on VA loans with an approve/eligible per AUS. However, lenders may have their own overlays where they cap the debt to income ratio at 45% DTI on VA loans. Capital Lending Network, Inc. has approved and closed countless VA loans with AUS approval with under 600 credit scores and debt to income ratios surpassing 60% DTI. The main reason lenders have overlays on government and conventional loans is to reduce their level or risk of borrowers defaulting and/or foreclosing on their mortgage loans. All lenders need to sell mortgages they fund to Fannie Mae and/or Freddie Mac so they can pay off their warehouse line of credit. If a lender sells a bad mortgage to Fannie Mae and/or Freddie Mac, Fannie Mae and/or Freddie Mac will force the lender to purchase the bad loan back. This then becomes a bad loan and the lender need to keep it on their books until the borrower pays it off by refinancing and/or selling the home. Lenders do not want to tie up their warehouse line of credit and keep bad loans on their books because they cannot originate and fund more loans. Lenders believe having lender overlays, it helps minimize and reduce the risk tolerance they need to take in having to buy back bad mortgages after they sell it on the secondary mortgage market.

Qualifying For A Mortgage With A Lender With No Lender Overlays

Over 75% of our borrowers at CLN Mortgage Group are folks who could not qualify at other lenders due to their lender overlays. Capital Lending Network, Inc. has no lender overlays on government and conventional loans. If you need to qualify with a mortgage company with a lender licensed in multiple states with no lender overlays on government and conventional loans, please contact us at Capital Lending Network, Inc. at 262-716-8151 or text us for a faster response. Or email us at contact@gustancho.com. The team at Capital Lending Network, Inc. is available 7 days a week, evenings, weekends, and holidays.

4 comments

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4 comments

Kristen O'Malley November 28, 2020 - 7:44 pm

Keep getting denied because I don’t have the best credit

Reply
Gloria Manning December 6, 2020 - 4:48 pm

I have never owned a home. Working with credit repair now to boost score. My husband has the credit but I have more income. Between the both of us we gross almost 6000 monthly…We were in a rent to own but it was a disaster. Just looking for a way to get in a forever home.

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Laurie Mason December 29, 2020 - 5:07 am

Hello. I know I’m not credit ready at the moment to do a cash-out refinance on my home but I would like to know what I need to do in order to be ready to do a cash out refinance within the next year and then purchase a single-family home with an FHA loan. If someone could reach out to me with assistance, it would be greatly appreciated. Thank you!

Reply
Gustan Cho January 1, 2021 - 6:02 pm

Laurie, I will have my Associate Mike Richardson reach out to you.

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