Lender Overlays
22 Nov

2017 Lender Overlays

Lender Overlays: What Are They?

If you aren’t sure what Lender Overlays are and you have applied for a home loan in the past then you have probably run into them without even knowing it. In previous articles you have read on Mortgage Scenarios you see that we will reference Lender Overlays frequently and how we are different than other lenders by not having Lender Overlays.  Most of you reading these articles are probably wondering what is a Lender Overlay?  The answer to this question is rather simple in the fact that a Lender Overlay are additional guidelines put into place by a lending institution which are in addition to the minimum loan program guidelines that are published.  If the initial thought is to wonder if this is legal, yes, it is 100% legal but is it fair, maybe not.  Lenders are well within their rights to determine the type of borrowers they are looking to approve and lend to and through Lender Overlays lenders can minimize the risk associated with certain borrowers.

If you are working in a risk department for a lot of lenders then you are going to want to develop additional guidelines that will ensure the borrowers that do get approved adhere to your guidelines and are more “creditworthy.”  If you are borrower without a strong file for a mortgage you will definitely have a tough time getting approval from most lenders which is why there is a need for Mortgage Scenarios and our lending with zero lender overlays on our mortgage products.  If you are in the market for a home loan and want to avoid going from lender to lender looking for an approval you need to reach out to us today as we will get you approved with the minimal loan program guidelines.  Also, don’t be convinced by expensive advertising making it seem like a lender has your best interst in mind and can get “anyone” approved.  You will soon find out shortly after your application is submitted that you will not meet their stringent guidelines.  Here at Mortgage Scenarios we know this is could be a stressful time and we are not here to waste anyone’s time.  If we can get you approved, we will tell you upfront and not string you along.

Lender Overlays: Examples

Now that you are familiar with what Lender Overlays are, we can go over different lender overlay examples to make sure you can spot Lender Overlays.

  • FICO Credit Score: One of the easiest of the Lender Overlays to spot and identify is the overlay associated with your FICO credit score.  Let’s take an example of an FHA Loan program where a 3.5% down payment loan can be had with only a 580 FICO.  Let’s say you have a 610 FICO credit score and you still receive a denial to your loan application due to this credit score you can thank Lender Overlays for this.  A lot of lenders want 620, 640, or even 660 FICO scores in order to even think about approving your loan.  Here at Mortgage Scenarios we pride ourselves on being able to take FHA’s minimum guidelines and get you approved accordingly.
  • DTI Ratio: DTI or debt to income ratio is another loan guideline where you will find lender overlays put into place to limit the amount of debt you will be able to get approved with.  Another example here can be seen with an FHA Loan with a 620+ FICO score where we know the maximum DTI ratio is 56.9%.  There are plenty of lenders who don’t want to approve loans for borrowers who have this much debt and would prefer you are in the 45-50% range to get approved.  By lenders reducing your DTI ratio by 10%+ your purchasing power can be seriously reduced.  You can see this in the following:

o   $5,000 Gross Income

o   DTI ratio at 45% = $2,250

o   DTI ratio at 56.9% = 2,845

o   Negative impact of $595 in allowable debt

Demand For No Lender Overlays

Here at Mortgage Scenarios we have seen that 70% of our borrowers were previously denied at other lenders and this is due to Lender Overlays which treat prospective borrowers unfairly and hold them to higher standards than minimum guidelines.  The reason why FHA and VA loans are so popular is due to the very relaxed minimum guidelines needed to get an approval.  When Lender Overlays are present the consequence is an increase in borrowers getting denials and this is fine because we will always be here to work with previously denied borrowers.  We want to make sure we explore every option to get you approved and in your desired home.  There isn’t a need for you to get the “run around” from other lenders when we are confident to get you approved and if not, we will develop a customized plan to get that approval for you.  Please reach out today and we can get started!

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