The Most Common FHA Lender Overlays

Auggie Capistrano Last Updated Aug 07, 2017 (0) comment

Common FHA Lender Overlays

You are SO close to the home of your dreams. You have picked out the property and based on your research you believe that you meet the minimum guidelines for FHA mortgage eligibility. But does your loan checklist match what the private lender is looking at? What happens when what you thought was a guaranteed application approval turns into news that you just don’t qualify? In cases where a private lender has additional requirements that overlay or add to the FHA minimum, you’ll have to be sure you meet these guidelines before you’re able to move forward.

According to a recent article in Forbes, there are a few reasons that a buyer might have to conform to lender overlays. At the end of the day, everything has to do with risk.

So What Are The Most Common FHA Lender Overlays?

A few things to note is that lender overlays may help or harm your ability to get the best interest rates and mortgage terms depending on what your application looks like.

Here is a look at some of the more common factors that trigger a lender overlay flag:

Credit Scores

According to Trulia, even “above average” credit scores may show lender overlays and anything below 740 poses some sort of risk to a lender. The minimum to qualify is 580 however most approved mortgage applications for people under a 620 FICO score will have lender overlays.

Debt To Income Ratios

These follow credit scores pretty closely and even if your DTI meets the FHA minimum, a lender overlay may actually present this as a non-starter for your loan application.

Employment History

Is your job history short or unstable? If you have bounced around a lot a lender may see your financial stability as uncertain. If a lender thinks that your job history is questionable then you may expect either a more costly loan in terms of interest rates or perhaps more scrutiny on other parts of your application.

Credit Tradelines

A credit tradeline is basically nothing more than an active credit account that shows a history of on-time payments for at least 12 months. Many home lenders want to see at least three credit tradelines and some may ask to see two years of payment history on each of these. An example of a positive credit tradeline may be lines of credit, car loans, and credit cards that are in good standing.

Collections and Charge Off Accounts

According to FHA guidelines, borrowers are not required to fully pay off any outstanding collection accounts and charge off accounts. Again, this is just a minimum requirement (or lack thereof). As lender overlays go, a private lender wants to know that if they give you money, they’ll be paid back. If you have collection or charge off accounts, this indicates a higher risk of not being paid back and a private lender will almost always have a lender overlay that addresses these heightened risk factors.

How Do I Avoid Mortgage Overlays?

This is a very fair question and there are some things you can do to better position yourself for the best mortgage option possible. If you are able to work down the mortgage checklist and after everything, your application shows that you are an attractive borrower and a lender overlay may not even be on the table.  In these cases, you may pose little risk to the lender and likely show a healthy credit score, low DTI ratios, a stable employment record, and you probably also have cash for a decent down payment.

In other cases, let’s just say that you are like many people and you are close to being approved but… There’s a but involved here.  You’re on the cusp of that final loan approval but lender overlays are holding you back from moving. There are some things you can do and the first one is quite simple. Just shop around! There are many mortgage lenders and not every one has the same requirements and restrictions.

Alternatively, if you plan well you should be able to improve your financial standing. Do things like pay off any credit cards, pay bills on time, and do what you can to build a healthy down payment. At the end of the day, the more cash you put down, the lower your cost of borrowing should be over time.

Auggie Capistrano

Chief Staff Writer at FHA Loan Search
Auggie Capistrano is an award-winning reporter and editor with more than 15 years of experience in journalism and personal finance. Auggie's background includes covering mortgage news and providing home buying tips for the Texas, California, New York, and Florida markets. He has a B.B.A. in Real Estate Finance and a Master's Degree in Journalism.
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