HUD Guidelines Versus FHA Lender Overlays On FHA Loans

BySapna

This Article is About The HUD Guidelines Versus FHA Lender Overlays On FHA Loans

Many homebuyers, especially first-time home buyers, are often under the belief that all Lenders have the same FHA Mortgage Guidelines. Just because a borrower may not qualify with one lender does not mean that they do not qualify for an FHA Loan. All lenders with overlays have different mortgage guidelines on FHA Loans. This is often not the case. There is a difference between HUD Guidelines Versus FHA Lender Overlays. Under HUD Guidelines on credit scores, HUD requires a 580 credit score for 3.5% down payment FHA Loans. However, most banks require 640 credit scores while other lenders may require 620 credit scores. The higher credit score requirements are called FHA Lender Overlays On Credit Scores. There are many overlays a lender can impose. The good news is that are lenders like Gustan Cho Associates that have no overlays on FHA Loans. Gustan Cho Associates only goes off HUD Guidelines and has ZERO OVERLAYS on government and conventional loans.

In this article, we will discuss and cover HUD Guidelines Versus FHA Lender Overlays On FHA Loans.

The Federal Housing Administration And FHA Loans


The United States Housing and Urban Development, also known as HUD to most, is the parent government agency of the Federal Housing Administration  (FHA). FHA is not a lender. FHA is a government agency whose role is to promote homeownership in the U.S. by insuring private lenders on FHA Loans. HUD insures FHA Loans that banks and private lenders originate and fund that goes into default and foreclosure. HUD will insure the loss on lenders that followed HUD Guidelines when originating and funding loans. Due to this guarantee, banks and lenders are able to offer FHA-insured home loans to hard-working American Families with only a 3.5% down payment and with less than perfect credit.

More On HUD Guidelines Versus FHA Lender Overlays

HUD Guidelines Versus FHA Lender Overlays: There are two separate types of lending guidelines

  1. HUD Guidelines
  2. Lender Overlays

HUD Guidelines Versus FHA Lender Overlays:

  • HUD Guidelines are FHA Guidelines that all lenders need to follow in order for FHA Loans they originate to be insurable
  • Overlays are mortgage guidelines that are above and beyond those of FHA Guidelines that lenders can impose
  • All lenders need to follow HUD Guidelines

However, any lender can have higher mortgage lending requirements than those of FHA Guidelines:

  • FHA loans are insured by HUD and enable lenders to provide FHA loans
  • FHA loans make homeownership possible to many Americans by only requiring a 3.5% down payment on a home purchase
  • FHA loan programs also make homeownership possible to home buyers with less than perfect credit

HUD makes it possible for those who have had an economic event in the past such as bankruptcy and/or foreclosure become homeowners as long as they have passed the mandatory waiting requirement.

HUD Guidelines Versus FHA Lender Overlays On FHA Loans

The Federal Housing Administration also offers the following:

  • FHA streamline refinance mortgage loans
  • Refinance mortgage loans
  • Cash-out refinance mortgage loans
  • Home purchase loans to home buyers who are interested in 2 to 4 unit owner-occupied multi-unit properties
  • FHA 203k Loans
  • Reverse Mortgages

Owner Occupancy

Government loans are for owner-occupant primary home mortgages only. There are three government loan programs. FHA, VA, USDA loans. FHA loans are only available to owner-occupied properties only. Second-home and investment home financing do not qualify for FHA-insured mortgage loans. Homeowners need to live on a home that is mortgaged with an FHA loan for at least 12 months. After 12 months, they can still keep the FHA loan and rent the property out. One to four-unit residentially zoned home is available for a 3.5% down payment FHA loan.

FHA Mortgage Lenders

The Federal Housing Administration is not a mortgage lender. It is a government agency under the United States Housing and Urban Development that insures HUD lenders on all of the FHA loans they originate. FHA loans are originated, processed, underwritten, and funded by mortgage lenders such as HUD-approved banks, mortgage bankers, correspondent lenders that need to abide by HUD guidelines in originating FHA loans in order to be insurable by HUD. Licensed mortgage brokers need to be licensed in the states they want to originate loans by the NMLS and be hooked up with wholesale lenders who are HUD-approved.

Mortgage Lender Overlays By FHA Loans

Each FHA mortgage lender has its own mortgage lender overlays. Overlays are additional guidelines the mortgage lender has that surpass the minimum HUD agency mortgage guidelines set by the Federal Housing Administration. Homebuyers who have minimal credit scores and prior credit issues can qualify for FHA Loans. All borrowers must minimum standards of FHA guidelines.

Minimum FHA Mortgage Guidelines

Minimum FHA guidelines are the following:

  • 500 credit scores to qualify
  • For any borrower between 500 and 579 FICO scores, a 10% down payment is mandatory
  • 580 to 619 credit scores, 3.5% down payment is required and maximum debt to income ratios cannot exceed 43% back end debt to income ratios
  • 620 credit scores and higher, 3.5% down payment and 56.9% debt to income ratios allowed as long as approve/eligible per DU FINDINGS

2 year waiting period after a bankruptcy discharge:

  • 3 year waiting period after foreclosure, deed in lieu of foreclosure, short sale

Foreclosure and deed in lieu of foreclosure waiting period start from the recorded date of the sheriff’s sale or the date the deed was transferred out of the homeowner’s name into the mortgage lender’s name.

FHA Guidelines On Collections And Derogatory Credit

Open collections are allowed. Restrictions with judgments and tax liens. Homebuyers with judgment and/or tax liens can qualify. But they need a payment agreement with the judgment creditor or the IRS for tax liens and proof of a minimum of three months payment. The proof is provided by providing the mortgage underwriter with three months’ canceled checks. Rental verification may be required by providing 12 months of canceled checks to the landlord. This holds true unless the renter is renting from a property management company. Then a letter from the property management company is sufficient. Re-established credit and no late payments after bankruptcy and/or foreclosure may be required to get an approve/eligible via Fannie Mae’s Automated Underwriting System

Many FHA mortgage lenders may impose their own lender overlays such as a minimum of 3 to 4 credit tradelines for a minimum of 12 to 24 months. Needs to be owner-occupied properties. One to Four units. Gifts funds for a down payment are allowed. The donor of the down payment needs to be a relative and/or close friend. There cannot be any repayment agreement are allowed.

FHA Condominium Loans: HUD Approved Condos Only

It is getting more and more difficult to purchase a condominium with FHA Loans. However, condo buyers can buy condominiums with FHA loans but the condominium complex needs to be HUD Approved. More and more condo complex are not renewing their HUD Approval because of the costs involved.

To see if the particular condo is FHA Loans approved Visit http://entp.hud.gov/idapp/html/condlook.

HUD Guidelines Versus FHA Lender Overlays: Qualifying With Lender With No Overlays On FHA Loans

Over 75% of our borrowers at Gustan Cho Associates are folks who either got a last-minute mortgage loan denial or are stressing over their mortgage process with another lender. The only reason for a mortgage denial or stress during the mortgage process is because the loan officer did not properly qualify the borrower. Most mortgage lenders have overlays. Gustan Cho Associates is one of the few lenders nationally with zero overlays on government and conventional loans.

Typical Overlays By Mortgage Lenders

Here are HUD Guidelines Versus FHA Lender Overlays & Typical Common Overlays:

  • Overlays on credit scores
  • Overlays on debt to income ratios
  • Overlays on collections and charge offs
  • Overlays on FHA Loans During And After Chapter 13 Bankruptcy With No Waiting Period

Home Buyers who need to qualify with a direct lender with no lender overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

Understanding HUD FHA Guidelines Versus Overlays

Where can you find HUD guidelines?

The simple answer is Google, but you will find plenty of contradicting information. Mainly because the majority of lenders add overlays to the bare minimum HUD guidelines. These additional overlays can confuse borrowers. While we appreciate you doing research on your own, we strongly encourage you to call Gustan Cho Associates directly with questions. We will let you know if you are running into a guideline issue or simply a lender overlay issue. The best place to find guideline information is our blog archive.

Our blogs are written directly off the guidelines of the 4000.1 FHA HANDBOOK and the VA HANDBOOK, nothing additional.

HUD FHA Guidelines Versus Overlays And Typical Lender Overlays

What are some common overlays?

All lenders need to meet the minimum HUD Agency Mortgage Guidelines. However, lenders can have any types of overlays they want. One lender may have an overlay on one item but another lender may not. Lenders can have lender overlays on credit scores, DTI, Manual Underwriting, Collections, Charge Offs, and other items.

We will discuss the most common lender overlays imposed by lenders in the following paragraphs.

HUD FHA Guidelines Versus Overlays On Debt-To-Income-Ratio

Debt to income is a MAJOR hurdle Americans must get over to qualify for a mortgage. Each loan program has different qualifications for debt to income ratios. Many lenders cap their MAX DTI requirements lower than the true guideline. For example, lenders will cap DTI at 50% for an FHA loan. Even though the Automated Underwriting System (AUS) will allow you to go up to 56.9% back-end DTI. We underwrite directly to AUS. The same is true for a VA loan, technically on a VA mortgage, there is no maximum debt-to-income ratio requirement. However, you must pass residual income and underwriter discretion. In the past, Gustan Cho Associates have closed VA mortgages with back-end debt-to-income ratios above 62%.

HUD FHA Guidelines Versus Overlays On Credit Scores

Credit score requirements are a common lender overlay in the industry. Many articles on the internet will lead you to believe you need a minimum of a 620 score for a VA mortgage. That is not the case. There is no minimum qualifying credit score for a VA mortgage. The interest rate is driven based on credit score, but you can qualify for a VA mortgage with a low score. According to the 4000.1 FHA HANDBOOK, you can get an FHA loan with a 500 credit score (with 10% down payment). Many lenders have overlays and require a 620 or even 640 to qualify for an FHA mortgage. We go down to 500 with 10% down payment and 580 with a 3.5% down payment.

HUD FHA Guidelines Versus Overlays On Collections And Charge-Off Accounts

Collections and charge-offs are a grey area and involve many overlays. Many lenders require Collections and charge-offs to be paid prior to closing. Once again, this is not a guideline. The guideline reads the mortgagee is not required to include charged-off accounts into the borrowers’ liabilities or debt for FHA mortgages. Any outstanding NON-MEDICAL collections are required to be counted against your DTI. The 5% rule goes into effect. For example; If you have a $2,500 collection for an old cell phone bill, 5% of $2,500 or $125 will be counted against your DTI ratio.

VA sees collections and charge-offs slightly differently. Once again, charge-offs are not required to be included against your debt to income ratio. However, NON-MEDICAL collections are. VA recently changed the guidelines for NON-MEDICAL collections, the lender must now verify if a payment is due. Please see our VA COLLECTION UPDATE BLOG for more details.

HUD FHA Guidelines Versus Overlays On Gift Funds

The use of gift funds is acceptable for VA and FHA mortgages. They may not be counted for RESERVES, but they can be counted for the down payment and closing costs. The gift funds must come from an acceptable donor. Many lenders have additional overlays when it comes to the use of gift funds. This is due to default data and the use of gift funds, making the loan riskier. When you are dealing with your own money, you are more likely to pay your mortgage on time, according to years of data. Many lenders do not allow gift funds with credit scores below 620 (some banks 640). The HUD guideline does not mention any credit score restrictions with the use of gift funds. We allow gift funds with credit scores down to 500.

Non-QM And Specialty Mortgage Programs Offered At Gustan Cho Associates Mortgage Group

The Gustan Cho Associates offer a wide range of mortgage products, including many specialty loan programs. A few examples of specialty mortgages include VA RENOVATION LOANS, DOWN PAYMENT ASSISTANCE PROGRAMS, NATIONWIDE HIGH BALANCE MORTGAGES, and FHA 203K LOANS WITH MANUAL UNDERWRITING.  

Gustan Cho Associates excited to offer specialty programs to our clients. The specialty programs come with their own overlays. For example, down payment assistance programs have a debt to income caps of 47.99% compared to 56.9% without using down payment assistance funds. The specialty programs help many of our clients achieve home-ownership or renovate a property to their liking.  Borrowers can qualify for an FHA and/or VA loan during the Chapter 13 Bankruptcy repayment period after one year into the repayment plan. Trustee approval is required. The bankruptcy trustee wants to make sure the borrower has the ability to repay their new housing payment which consists of principal, interest, taxes, and homeowners insurance. There is no waiting period after the Chapter 13 Bankruptcy discharged date to qualify for FHA and/or VA loans.

Please contact us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at Gustan Cho Associates at gcho@gustancho.com for more details on our specialty loan programs.

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