Beware of Mortgage Overlays!
FHA and VA (for Veterans) are great mortgage programs that make the dream of homeownership available to many Americans. The US government sponsorship of these programs is key because without mortgage insurance, lenders would never accept a 3.5% down payment (FHA) or 0% down payment (VA). Because the government sponsors these mortgage programs, they establish minimum guidelines that mortgage lenders must adhere too.
So does that means all FHA and VA mortgage lenders are the same?…..NO. Many lenders will “overlay” additional requirements on top of the government requirements. Does this help you? No. It helps the lenders avoid riskier borrowers. That is fine. Every lender should decide how they want to run their business. The problem is that many lenders don’t disclose what the government requires vs what they decided to add-on themselves. This means that if you apply for an FHA or VA mortgage with a lender using overlays, you may be denied when you could be approved by another lender. That is not right.
How can you avoid lender overlays? They come in many different shapes and sizes but a quick litmus test that you can do is to check lender FICO scores.
What is the government minimum FICO for an FHA mortgage with 3.5% down payment? It’s 580 and it didn’t change with COVID. But many lenders did change. They raised their FICO requirements so it’s harder today than before to find a lender offering 580 FICO FHA mortgages. Why? Because lenders wanted to lower their risk profile and/or because their investors or lenders told them to (mortgage lenders borrow money to finance their business and have to answer to their lenders).
What is the government minimum FICO for a VA mortgage? THERE IS NONE, but many lenders will tell you there is.
When you are getting ready to apply for a mortgage, shop around. The first thing you should ask a lender is what is their minimum FICO requirement. If its higher than above, they are using overlays and you should look for another lender. If they pass the FICO litmus test, it doesn’t mean you are in the clear. If a lender tells you 580 FICO for FHA or no minimum FICO for VA, you should still ask them “I see you are in line with government requirements for FICO. Do you use any other overlays in your underwriting?” You may be surprised how many loan officers don’t know and have to get back to you.
If you have a good FICO score, why does this matter? Because a lender may be using other overlays like how they factor in your overtime pay, etc. that will cause a problem with your mortgage approval. Of course, you want to compare fees and pricing as well….but don’t forget to check for overlays!
What if you want to buy a home today but can’t qualify for an FHA or VA mortgage? Consider the Dream America Program. We will work to get you into the house you want now and give you a roadmap to qualify for a mortgage over the course of a 12-month lease. Some people call this lease to own or rent to own. What sets the Dream America Program apart from other lease to own companies is our focus on helping our clients get mortgage ready ASAP; not just offering them a lease option that goes on year after year after year.
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