Mortgage Overlays Are Your Lender’s Made-Up Rules

November 06, 2020 by Dan Green

Getting a mortgage approved can depend on the lender with which you apply. One mortgage lender’s denial is another’s strong approval.

It’s because of Investor overlays; and, when a mortgage loan gets denied, it’s good sense for borrowers to re-apply for that loan somewhere else.

Investor overlays are an additional set of mortgage qualification standards imposed by a lender, beyond what’s a mortgage program’s official guidelines require.

Examples of investor overlays include:

  • Raising minimum credit score requirements on a loan by twenty points
  • Reducing a borrower’s debt-to-income ratio by a certain number of percentage points
  • Increasing a home buyer’s waiting period after a short sale or foreclosure event

Investor overlays are especially common with FHA loans.

According to FHA loan guidelines, a home buyer can get approved for an FHA mortgage with a credit score of at least 500. But, finding a lender that allows a five-hundred score can be a challenge.

Mortgage lenders tend to enforce an FHA credit score overlay that raises minimum FICO requirements as high as 660. Loans with credit scores below that are denied at the point of application.

If that’s you, don’t stop looking for that FHA-backed loan. Overlays vary between lenders. You might get approved somewhere else.

Government data shows that 1-in-5 mortgage approvals are made after an initial mortgage turndown. Don’t let a denial set you back.

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