In the mortgage industry, lender overlays are additional requirements that a lender imposes on top of the minimum guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. Overlays can be implemented for any number of reasons, such as risk management, to ensure a consistent lending standard across all of the lender’s products, or to meet the specific needs of a particular borrower or market segment. This article Is about the most common lender overlays in Government and traditional loans. FHA, VA, USDA, and Conventional loans are the most common having lender overlays.

What are Overlays in Mortgage Industry?

Overlays are additional mortgage requirements imposed by a lender who is above the minimum lending standards of the relevant mortgage loan program. Many first-time homebuyers and purchasers were harmed by the 2008 real estate and mortgage collapse. They had a bankruptcy or foreclosure in the past. For years, many house buyers have been renting.

They’ve been attempting to improve their credit. Many of them have studied the FHA Guidelines and discovered that they fulfill all of the FHA mortgage lending standards. They were frequently refused a home loan because they did not meet the requirements. In this post, we’ll talk about and go through common lender overlays on government and conventional loans.

While GSE guidelines set a baseline for what is considered a “qualified mortgage,” lenders are free to impose stricter requirements (overlays) on top of that. This can make it more difficult for some borrowers to qualify for a mortgage, as they may need to meet the overlay requirements in addition to the guidelines set by the GSEs.

Guidelines from the Government Versus Overlays from Banks

That is precisely the situation where HUD states that a 3.5 percent down payment FHA Loan applicant only needs a 580 credit score but the lender to whom the borrower goes requires a 640 credit score. This is entirely acceptable because lenders are not obligated to take borrowers who simply fulfill Agency Requirements.

Lenders may impose higher mortgage lending standards on their customers than the FHA requires. Borrowers should understand that just because one lender states they do not qualify for an FHA loan does not imply they do not qualify for one elsewhere.Some lenders, such as myself, do not utilize mortgage lender overlays. We just rely on the automated findings of the Automated Underwriting System.

Pros and Cons of Mortgage Lender Overlays

The Advantages and Disadvantages of a Lender Overlay


There are both benefits and drawbacks to lender overlays. On the one hand, overlays can help protect lenders from risk and ensure that borrowers are able to afford their mortgages. On the other hand, they can make it more difficult for borrowers to obtain a mortgage and can cause delays in the mortgage approval process.

Not all lenders have the same lending standards for government and conventional loans. Government and conventional loans are not subject to lender overlays at CLN. Due to lender overlays, roughly 75% of our clients were unable to qualify at other lenders. If you need a lender with no lender overlays or want to qualify for non-QM loans, apply NOW using CLN. We are fortunate to be able to offer mortgage funding without additional guidelines on government loans.

Other mortgage lenders have implemented credit score overlays to their existing mortgage solutions. Most investors are wary at present. Making them add more qualifying criteria to obtain a mortgage so they can be approved is a smart idea. Fortunately, we do not have to worry about that today. We’ll go through a few loan situations that we’ve funded during the pandemic, as well as how to apply for a mortgage, in this blog.

Common Lender Overlays on VA Loans

  • You can have collections accounts for past 12 months when applying with us
  • Most lenders now demand at least a 620 in order to close a VA mortgage.
  • There is no true credit score requirement for VA loans. Va Loans has no minimum required FICO score.

Lender Overlays on Self-Employed Borrowers

  • The return of non-QM mortgage loans is beginning to become more popular.
  • Our team has just completed a bank statement mortgage for the first time in months.
  • This is great news for self-employed borrowers.
  • Most self-employed barbers take advantage of tax deductions to reduce their tax burden to the IRS.
  • At the start of the pandemic, conventional mortgage products such as fixed-rate and no-deposit mortgage offerings vanished quickly. Bank statement loans are making a comeback.
  • The borrower of this bank statement had a 780 credit score and a 20% down payment.
  • Three months’ worth of reserves were necessary for this bank statement software.
  • We previously had access to a lower reserve requirement through underwriting.
  • They are not allowing any exceptions due to the COVID-19 coronavirus outbreak, which is a good thing.
  • Please see our article on bank statements loan for further information on these options.

Medical Collection Accounts and Non-Medical When Applying For a Mortgage

The FHA does not require borrowers to pay off charge-off accounts or collection accounts. Medical payments and charge-off accounts are not factored into the borrower’s debt-to-income ratios. A new non-medical collection account is opened for each additional $2,000 in unpaid medical debts. This threshold will be adjusted annually to reflect changes in the cost of living index.

Borrower’s debt to income ratio calculations will include 5% of the outstanding unpaid collection account balance starting at $1,500. However, if the outstanding collection account balance is significant, the borrower may choose to do any of the following:

  • I am authorized to collect debts for this company and have a written agreement with the creditor or collection agency.
  • The lender will use the borrower’s monthly debt payment in place of the 5% of the outstanding collection account balance in determining the borrower’s debt to income ratios rather than using that figure as a monthly debt payment.

There are no limits to the amount of payments that must be made to the creditor or collection agency.

Lender Overlays on FHA Loans

The FHA does not lend money to borrowers with a credit score lower than 580. We closed an FHA mortgage with a credit score of 525 in the fourth month. The borrower had many recent medical collections, which significantly damaged their credit score.

However, they needed a down payment of 10% and one month of reserves following the down payment and closing costs. Despite the fact that we had to manually underwrite this loan, we were still able to get it done. For FHA mortgage financing, most lenders now demand a 620 or higher. Keep in mind that this is only an overlay. The minimum credit score requirement for an FHA loan is 500 according to HUD standards. Please visit our blog on manual underwriting for additional details.

Common Overlays on Credit Score Requirements

To get a mortgage from the Federal Housing Administration (FHA), one needn’t have an excellent credit score. According to HUD, for a 3.5% down payment home purchase loan, the borrower must have 580 credit scores. Even if you only need a FICO of 580, most lenders will use overlays on your credit scores that will increase a minimum qualifying credit score to 620 or 640.

This is a credit score lender overlay that the bank or mortgage lender may impose. Other lenders may have credit score standards of 620 and 600, respectively.

Required Documents We Need To Get Your Approved For Mortgage With No Overlays

Documents to gather:

  • The last 60 days of bank statements can be obtained to find funds for the down payment.
  • Pay Stubs for the Last 30 Days
  • W2’s for the last two years Last two tax returns (not always necessary)
  • A driver’s license or a state ID is required.

Mortgage companies are under greater pressure than ever before. We had a customer who has been seeking to refinance their property since April. A home refinancing should not take more than four months to complete. The reason for the delay is a rise in mortgage applications. Mortgage businesses are attempting to move as quickly as possible. We’re still able to finish and fund refinancing transactions on time. If you’re not receiving the customer service you deserve or are experiencing a lender overlay, please contact us immediately.

Mortgage Bank Overlays on DTI

Debt-to-income ratios are one of the most important aspects when it comes to qualifying for a house loan.

debt to income ratios are calculated:
  1. Adding all of the monthly minimum payments together divided by the borrower’s monthly gross income, The borrower’s debt-to-income ratio is calculated by dividing the amount or percentage of their outstanding loan by income.
  2. With FHA Loans, the maximum debt-to-income ratio is 56.9 percent for borrowers with credit scores of 620 or higher. If your credit scores are below 620, you may have a 43% debt-to-income ratio if you obtain approval/eligibility per AUS.
  3. However, many borrowers with credit scores of 620 or higher who seek an FHA loan are told that they do not qualify. This is due to the fact that their debt-to-income ratios are greater than 45% DTI.
  4. The debt to income ratio of a borrower’s loan is often capped at 43% or 45 percent depending on the lender.
  5. Lenders may grant an exception to the 50% debt-to-income ratio or even 55% debt-to-income ratio.
  6. They may include any number of conditions, such as allowing a higher debt to income-ratio if the borrower’s credit ratings are greater than 680 FICO credit scores.

Payment Shock and Lender Overlays

One of the most significant compensating elements for a mortgage borrower is the Verification of Rent. Payment Shock is one of the most crucial aspects evaluated by an underwriter while evaluating and funding a borrower with poor credit and high debt-to-income ratios. Payment shock is the effect that a new mortgage payment will have on a homeowner’s previous rental payments.

There is no payment shock if the renter pays $1,000 per month in rent and the new mortgage payment will be $1,000. This is because the new home buyer’s monthly housing payment will be equal to or less than what he or she was previously paying.

As a result, the mortgage underwriter will be very confident in granting the borrower a mortgage loan. The borrower’s marginal credit history and greater debt-to-income ratios will go unnoticed by the underwriter. Because there is no payment shock, this is a huge compensating element. However, in order for rental verification to be correct, the renter must provide 12 months of timely canceled checks paid to their landlord.

Alternatively, 12 months of bank statements showing the hire payments being transferred from the renter’s bank account to the landlord’s bank account are required.If the renter is renting from a registered property management firm, the property manager of the property management company can fill out and sign a verification of rent form, or VOR. VOR was created by lenders as an alternative to providing canceled cheques and/or bank statements.

Bank Mortgage Overlays After Filling For a Bankruptcy 

After Chapter 7 and 13 Bankruptcy, FHA has stringent requirements for qualifying for an FHA Loan. There is a two-year waiting period after Chapter 7 bankruptcy to qualify for an FHA loan. After Chapter 13 Bankruptcy, there is no waiting period to qualify for an FHA mortgage. The majority of lenders apply lender overlays to FHA loans following Chapter 13 bankruptcy.

After Chapter 13 Bankruptcy, mortgage lenders may impose lender overlays of a one-year or two-year waiting period on an FHA Loan to ensure that the borrower is eligible. This is a mortgage lender overlay. Borrowers who are advised to wait one or two years after completing Chapter 13 bankruptcy, please contact us. To be eligible for an FHA Loan, you must not have lender overlays after your chapter 13 bankruptcy discharge date. After a Chapter 13 Bankruptcy is finished, all FHA Loans are subjected to manual underwriting. Verification of rent is necessary under manual underwriting conditions, which include prepayment and non-returnable security deposits.

We Don’t Have Lender Overlays Like Other Mortgage Lenders

Capital Lending Network, Inc. is a five-star national mortgage company with no lender overlays on government and conventional loans. So what are lender overlays and why is Capital Lending Network, Inc. so special? All mortgage lenders need to abide by the minimum agency mortgage guidelines set forth by HUD, VA, USDA, Fannie Mae, and Freddie Mac. However, lenders can have higher lending requirements that is above and beyond the minimum agency lending guidelines on government and conventional loans.

This higher lending requirement set by each individual lender that is above and beyond the minimum agency mortgage guidelines is called lender overlays. Let’s take an example to better understand what lender overlays are. The minimum credit score required per HUD Guidelines to qualify for a 3.5% down payment FHA loan is 580 FICO with an approve/eligible per automated underwriting system (AUS).

HUD, the parent of FHA, allows borrowers to qualify for an FHA loan with credit scores down to 500 FICO with an automated AUS approval. However, any borrowers with credit scores under 580 FICO and down to a 500 credit score, a 10% down payment is required versus a 3.5% down payment.

The Advantages and Disadvantages of a Lender Overlay

However, most lenders will require a higher credit score than 580 FICO such as a 620 to 640 credit score by their loan applicants even though FHA only requires a 580 FICO for a 3.5% down payment FHA loan. This higher credit score requirement by the individual lender is called a lender overlay on credit scores. Lenders can have lender overlays on just about anything such as debt to income ratios, outstanding collections and charged-off accounts, gift funds, and non-occupant co-borrowers.

The two most popular home mortgage programs 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, and USDA to partially guarantee and insure lenders, the lender needs 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, and 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

Agency Guidelines Versus Lender 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 do not have the backing of any government agency like FHA, VA, USDA loans. However, lenders need to make sure conventional loans they fund to 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 mortgages 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 have 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

Capital Lending Network, Inc. does not have any lender overlays. By no lender overlays, we mean ZERO OVERLAYS on FHA, VA, USDA, and Conventional loans. This is why not all lenders have the same mortgage guidelines on government and conventional loans due to lender overlays. CLN has a reputation of being able to do loans other lenders cannot do. Many borrowers and real estate professionals are amazed that a mortgage company like Capital Lending Network, Inc. exists. We are one of the very few national mortgage companies with no lender overlays on government and conventional loans.

To qualify for a home mortgage with a national mortgage company licensed in multiple states, please contact us at Capital Lending Network, Inc. at 800-900-8569 or text us for a faster response. Or email us at The team at CLN is available 7 days a week, on evenings, weekends, and holidays.