The Loan Lowdown – Overlays
Today we’re diving into the world of “Overlays“! 🏦✨ Getting denied by one lender doesn’t mean you can’t secure that loan! Let’s chat about what they are and why it’s super crucial to get educated before you apply for a loan. We’re here to help you figure out the right questions to ask! Let’s go! 💪💰
If you have any questions, would like some help understand the overlays, or would like to be on our show, make sure to contact us today: https://rrhomeloans.com/
Jane Petro and Jim Forrest, from Real Estate Resource Home Loans with our second podcast!! Today we are going to talk about “Mortgage overlays”. These are rules that are on top the regular rules. Rules, on top of rules, on top of rules.
Just to put things into perspective, a FHA loan has 1,871 pages of rules that we all have to follow. Conventional has 1,200 pages of rules for Fannie May. Overlays are the rules that the banks actually put on top of those rules. The most important thing to remember that the banks are never going to make it easier, they do have to follow these agency guidelines so the option to make them tougher is definitely on the table. Every lender out there has some overlays.
Probably the number one reason that your loans get denied, or struggle to get closed is probably due to overlays. If you have ever heard of someone asking for an ‘acceptation’? That’s probably due to an overlay.
So today we are going to talk about some common ones, that we see everyday.
1) Credit Score Overlay. FHA minimum is 500 for a credit score. So if it goes through their automated system, they are down to a 500 score. And when you start making phone calls, to banks if you were a first time buyer, what would you hear. 580, 620, 640 is what Jane would hear, it’s all over the place.
We work with so many different investors, and us knowing these different overlays, is crucial us to doing a good job for you. But we have investors that do have a 620 overlay for FHA, we also have some that go down to 580. But we also have investors that will allow us to go all the ways down to a 500 credit score on an FHA loan.
There are some differences with conventional loans, where most lenders are saying that you need 620 credit score. They will now average a credit score for a conventional loan, meaning if you have someone with a higher score and someone with a lower score, if you were to average those 2 scores that will be your score that you can use to get that loan done.
Jim actually had a 506 credit score go through the automated system for a condo, on a conventional loan, because we had some strength with another borrower on another loan that had a very high score.
Jim would say that credit scores are one of the largest, overlays in the industry.
2) Income Ratio. FHA allows you to go to 56.9% for FHA. Conventional is 50% for a good buyer, but you will hear lenders out there saying that the max that ratio is 50% for an FHA loan. 43% sometimes for a conventional loan. That automated system is the things that really makes the decision.
Remember if someone has worked with a bank for a long period of time, for the same lender, they believe that the overlay is the guideline. Don’t fall victim to that, there are always going to be other choices out there for you.
3) Employment Verification. Another overlay that is all over the place is job history and employment. Real Estate Resource Home Loans is looking for a two-year employment history, for the most part. We are not looking for someone who has been in the same field or with the same employer. But there are lenders out there that have “overlays” that want you to be with the same employer or in the same field. We’ve had a lot of buyers that are ready to buy that tell us “they are finally ready to buy because they have been in the same job now for 2 years.” And they must have gotten that advice from someone that has overlays. That is not true.
4) Assets. Having reserves, or even someone wanting more bank statements than actually what they need. We even have some lenders that want 2-months banks statements for an FHA loan, but FHA is fine with a 1-month bank statement. You’re really giving them more than you need to give them. The more you give, the more they have to look at, the more that they have the reason to not like it. We like to stick with the bare basics.
5) Reserves. (Reserves are, if you have a mortgage payment that is $2,000 then they need to have an additional $2,000 in the bank for one month or longer after closing.) We allow the automated system to tell us what the reserves will be. 2-months, 4-months, 6-months, 1-month, or none. Overlay can be added on top of the original system. There are some tricks that we have, that can help with reserves, and get a loan that was rejected, and with some tricks we can make it happen.
6) Property type. Manufactured homes. A lot of investors don’t want to mess with manufactured homes. Out of say, 15 different investors, we have several that do an unbelievable job on manufactured homes.
7) Foreclosures / Bankruptcy / Other types of credit. FHA needs you to be 2-years after a bankruptcy, 4-years for a conventional, foreclosures is 3-years for FHA, 7-years for a conventional.
Overlays, you can verify these rules yourself, there are no secrets. If you were interested in having these rules feel free to reach out to one of our loan officers, and we can get you these rules. We are in these selling guidelines on an everyday basis, and sometimes we need to challenge underwriters, to remove conditions.
Just because you have been denied by one lender, doesn’t mean that you are ineligible for that loan. That is a big misconception.
If you were a first-time home buyer, and you didn’t know anything about buying a home, and you met with someone that told you your debt-ratio’s are too high outside of the guidelines, I would think that’s the guidelines.
There was a lender, that wanted him to pay off some of his collections, there were specific guidelines that some.
Other overlays: Waiving escrows. Percentages down.
If you are denied, you have the right to ask if that is their “specific rule”.
