What Are Lender Overlays, and Why Should Care?

Lender overlays represent the additional rules mortgage companies observe to lower the risk they absorb when selling loans.

These additional requirements are voluntary, which is why your credentials might still not be good enough to some lenders even if you meet the essential criteria set in place by government agencies, like the FHA, and government-sponsored enterprises, like Fannie Mae and Freddie Mac.

To honestly assess your qualification for a New Mexico, Colorado, or Utah mortgage, it is imperative to be familiar to the most common lender overlays. Here, let us discuss some of them.

Minimum Credit Score

Credit scoring has been a useful tool for predicting a person’s likelihood of defaulting on a financial obligation. That is why many lenders have credit score minimums higher than those set forth by the government.

For instance, FHA loans are offered to borrowers with a FICO score south of 580, but many of the lenders providing them look for something better.

Mortgage lenders are continually reviewing the latest industry data to see which borrowers with specific credit scores tend to become delinquent.

Maximum Loan-to-value (LTV) Ratio

The LTV ratio is the portion of the property’s price a lender is loaning to a borrower. A mortgage with a 95% LTV means 5% of the house’s cost must be paid upfront.

If you want to know how much down payment you have to save up to qualify for the mortgage you like, you should ask your prospective lenders themselves. Again, mortgage companies are not going to adopt the minimum LTV requirement the authorities suggest if they feel it would be bad for their business.

Maximum Debt-to-income (DTI) Ratio

Generally, 43% of the highest DTI ratio a borrower should have to be considered as a capable mortgage payer.

However, many lenders are keen on doing business with individuals whose level of indebtedness is close to that number. Most mortgage lenders prefer borrowers with a DTI ratio lower than 36%.

How do you calculate your DTI ratio? Divide the sum of your monthly liabilities, including your estimated mortgage payment, by your gross monthly income.

Appraisal Requirement

Credit report with score on a desk

It is not unusual for a lender to demand a home appraisal even if the loan itself does not require such. Usually, your lender can take care of this chore for you, but it will be billed to you at closing.

If you really must order an appraisal to determine the current value of your property you wish to buy, you might be able to find your own appraiser and perhaps save some money.

Loan Type Restriction

Under certain circumstances, a lender might decline your application for particular types of home loan, like an adjustable-rate mortgage. All mortgage companies have their reasons for saying no to a customer, so it is important to be aware of the risks attached to each loan and property to know the train of thought of your prospective lender.

Going beyond the essential mortgage requirements matters to be considered worthy of a home loan by most lenders. Even if you find a lender that does not have overlays, you might be charged with a higher interest in exchange for the greater level of risk you present as a customer.

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