What Are “Lender Overlays”?
Government agencies such as the Federal Housing Administration(FHA) set forth specific mortgage guidelines. One example would be to qualify for a loan the FHA allows a minimum credit score of 580. However, some lenders require a much higher score to qualify for a loan from them. Why is this? Well even though the government sets forth guidelines lenders are allowed to set their own requirements and this is called lender or mortgage overlays.
Everything comes down to risk. Lenders want to minimize the amount of risk they take when giving out a loan. This is just another tool for them to minimize that risk. This allows lenders to potentially provide better rates.
There are some things to keep in mind when dealing with lender overlays that might help or hinder you.
What Incites Lender Overlays?
There may be some causes that are out of your control like an area declining in value, or there may be some things on your end you can manage.
Low credit score. The obvious first cause could be a lower credit score. Anything below a 740 could pose a potential risk to lenders. If this is the case you may need to raise your credit score quickly or compensate in other areas with your lender.
Debt-To-Income. If your debt-to-income (DTI) rate is too high then some lenders will back off even if you’re within their range.
Shaky Job History. If you have a history of instability holding a job or not enough experience a lender might show concern and issue a lender overlay. Typically more than 6 months at a job will start to ease lender tensions.
Short Credit History. Lenders want to see that you can handle dealing with credit. How you handle credit can show lenders how reliable you are.
How To Get Around Lender Overlays?
Lender overlays might be issued at good cause but if you feel like they aren’t fair then there might be ways around a lender overlay.
Explore Other Lenders. Other lenders have different regulations and restrictions. One lender might issue a 740 credit score and another 680. This alone could be the deciding factor on if you get a loan or not.
Improve Your Finance. Taking on things you might have been putting off for a while can really support you in getting the loan you desire and avoid the overlay. Start chipping away at the debt you owe and lower your debt-to-income ratio.
Down Payment. Making a large downpayment will show the lender that you mean business and are ready to make the move regardless of your history. This will show commitment and stability which is very attractive to a lender.
Patience Is Key
Regardless it’s going to take time to do any of these steps. Don’t sit around waiting for it to happen, take action now.The longer you wait, the more it will build up and the less you’ll want to do it. It seems tough now but before you know it you’ll be in a home that you’ve always wanted. How you deal with this can set you up for the next issue you may have. Enjoy it as much as you can!