what is a mortgage overlay

Mortgage Overlays – How Does it Affect Loan Approval

0 Flares Facebook 0 Google+ 0 LinkedIn 0 Twitter 0 0 Flares ×

What is Mortgage Overlays?

As a homebuyer, your might have often come across the term Mortgage Overlays. However, did you ever try to find out what it exactly means? We all face approval issues while home buying because of the non-compliance with mortgage overlays. Well, technically mortgage overlays are the set of rules that lenders follow above the guidelines laid down by FHA, USDA, VA, Freddie Mac and Fannie Mae.

Every lender has framed their internal rules or mortgage overlays that are applied to mortgage loans. Lenders frame the mortgage overlays after calculating its risk taking ability and the prevailing economic conditions. Thus, whenever there are tough economic conditions, you can expect the mortgage overlays of a lender to get stricter. The mortgage overlays are relaxed during prosperous times.

Mortgage Overlays are not equal

You will never find equal mortgage overlays for different lenders because everyone’s risk taking capability as well as economic assumptions varies. For instance, a customer with credit score of 610 might get approved for an FHA loan while the same customer can be rejected by another lender even when his or her credit score has improved to 650. It is up to the lender to decide whether it wants to approve a loan or not based on their mortgage overlays.

The debt to income ration set by FHA is 56.9% for approval of a loan but there are lenders who will not approve a loan if the debt to income ratio crosses their set limit of 43%. Similarly, the down payment requirements too vary from one lender to another. Freddie Mac and Fannie Mae have laid down the rule that homebuyers need to make a down payment between 5% and 10%. However, there are lenders who might ask customer to make a higher down payment based on their credit score or debt to income ratio.

These are some of the examples of parameters that individual lenders take into account while approving a loan. It is the lenders discretion as to what parameters it identifies a too risky and the parameters it is ready to accept. Not all the lenders are too strict with their mortgage overlays nor do they include all the above parameters while deciding on a loan.

There are different rules and varying scenarios that are taken into account by each lender and it can be extremely confusing for customers. Thus, it is imperative that you understand the basic difference between mortgage pre-qualification and mortgage pre-approval. If you are pre-approved and there are some mortgage overlays that apply to your loan, the loan officer is going to inform you about the same so that you are ready while applying. Loan process becomes lot easier with pre-approval and also ensures that you are able to avail the loan quickly and without any hassles.

Leave a Reply

Your email address will not be published. Required fields are marked *