July 22nd, 2016 6:29 AM by Jackie A. Graves, President
If overlays are hindering
your home-loan approval, there are ways to get help, like shopping around for
Here’s the scenario: You’re getting closer to
the home of your dreams in Dallas, TX.
Your research shows you’ll qualify for the mortgage you want, based on minimum
eligibility guidelines. Everything seems very black-and-white — until your
lender says you don’t actually qualify, or there are additional requirements to
meet before you receive that coveted stamp of approval on your loan
What’s the discrepancy? If Federal Housing Administration (FHA) loans allow a
credit score of 580, why would a lender require 640?
While there are clear mortgage guidelines set
forth by government agencies, lenders are allowed to tack on additional
requirements, called lender or mortgage overlays. These provide another level
of protection between lenders and the borrowers they believe are more likely to
“Everything boils down to risk,” says Mike
Shaw, a mortgage broker with Shaw Financial in Littleton, CO.
“Fannie Mae, Freddie Mac, VA, and FHA have set their minimum risk level, but
lenders are always able to increase that. Lenders build overlays so they can
manage their risk and feel like they can offer a good product with better
If you’re searching for a mortgage, there are
a few important things to know about lender overlays and how they might help or
hinder you in landing the best rates and terms on your mortgage.
While a lender overlay could come into play
simply because the property you’re buying is deemed “riskier” — as is the case
with condos and homes in declining areas — there are a few common financial
areas where lenders might establish stricter requirements.
have a moderate credit score. Your score might be above average, but anything below 740 poses some risk to lenders. This could mean your score
isn’t high enough to qualify with that lender and that product, or you will be
required to make up for it in other areas.
debt-to-income (DTI) ratio is high. Lenders use your debt-to-income ratio — your monthly debt obligations
divided by your monthly gross income — to determine whether you’re financially
able to take on the mortgage you’re after. Some lenders will turn down
borrowers with a high DTI, even if it fits within minimum mortgage requirements.
job history is short or unstable. A longer job history indicates financial
stability, and some lenders think that requires more than six months. This
could mean a costlier loan or more scrutiny placed on other areas of your
have a short credit history. If you aren’t a seasoned credit holder, it’s more
difficult to determine a track record for how you handle credit. Some lenders
want to see more than one or two lines of credit that are only a few years old.
Since FHA loans have notoriously low
requirements, they tend to be the top contender for additional mortgage
overlays, Shaw says. FHA guidelines state, for example, that borrowers can
qualify with a credit score of 580 or above and a minimum down payment of 3.5%.
With a down payment of at least 10%, credit score requirements dip below 580.
However, many lenders have scrapped this credit score guideline, opting for a
minimum of 620 or more, regardless of the down payment size. This doesn’t mean
you can’t find a lender that sticks to the FHA minimum guidelines, but the pool
of lenders will be smaller — and the trade-off could be in the rate you
If you’ve already checked off the boxes of an
attractive borrower — healthy credit score, low debt-to-income ratio,
substantial job history, high down payment — avoiding lender overlays probably
isn’t necessary. In fact, if you can be approved despite lender overlays, you
might even take advantage of lower rates and more favorable loan terms.
However, if you’re on the cusp of receiving loan approval but overlays are
keeping you stuck, there are options.
Shop around. Mortgage overlays vary and some
lenders don’t have any overlays. Being turned down for a mortgage from one
lender doesn’t mean it’s the end of the road; it could just mean you should look elsewhere.
Work to improve your financial situation. Tackle things like paying off debt to lower your debt-to-income ratio and
improve your credit score. This can make you look like a much better loan
candidate and potentially land you better loan terms.
Bring more cash to the table. A larger down
payment and higher cash reserves can make up for things like a low credit
score. Lenders want to see a financial commitment, and this can help substantially.
Kayla Albert - To view the original article click here