Why does it sometimes seem that underwriting guidelines vary from mortgage company to mortgage company? Well, it is because, sometimes they do. Each agency (Fannie Mae, Freddie Mac, FHA, VA, USDA) sets the minimum guidelines for the approval of a mortgage that they will back if it defaults. An overlay is when a mortgage lender adds an additional restriction to their guidelines. One huge misconception is that
There are many types of overlays. Some of the most common include:
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Agency Guideline |
Lender/Investor Overlay |
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FHA now has a 580+ minimum FICO |
Many mortgage lenders now have a 640+ FICO minimum for FHA loans |
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FHA's maximum DTI is set by DU findings |
Many mortgage lenders will limit the borrowers DTI to 50% or 55% even if DU approves higher |
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Not all programs require the review of Federal income tax transcripts |
Most mortgage lenders require a processed IRS 4506-T form for each borrower on the loan |
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FHA has a 90 Day Flip Waiver in place for owners who have been on title <90 days from the contract acceptance date |
Some mortgage lenders will not honor the 90 Day Flip Waiver |
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Fannie Mae allows up to 10 financed properties per borrower |
Some mortgage lenders have a limit of 4 financed properties per borrower |
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Fannie Mae HomePath mortgages for condos only require limited information |
Some mortgage lenders will a condo project review |
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Not all agencies require a credit inquiry explanation letter |
Most every mortgage lender will require a credit inquiry explanation letter |
When an Underwriter makes a condition that someone doesn't agree with, they are not just doing it because they want to. There is a valid reason behind it.
With a mortgage transaction, everyone is focused on the closing. Of course they are, since without a closing, keys don't change hands and real estate agents do not get paid. It's easy to get upset when you seeing someone standing in the way of that goal. What most everyone forgets is what happens after the closing.
If the buyer's loan ever defaults, it's the mortgage lender who will incur the financial losses. No one comes back to the seller demanding they take over the mortgage of the home. Likewise, no one comes back to the real estate agents demanding that they return their real estate commissions. None of that happens, except that the mortgage company is solely on the hook for the financial losses. That can equate from the tens of thousands to the hundreds of thousands. Those are huge numbers that no one else is sharing in now.
The next time that you see an underwriting condition that you don't agree with, don't whine, gripe, or complain about it, learn from it. Chances are, it will not be the last time that you see it. The more everyone keeps an open mind to learning, the easier you will find successful closings. While you may not really care about a mortgage companies long term success, I would bet that most of the employees do. It it their job to ensure that only the highest quality of loans are approved and subsequently approved. Ultimately, that is in everyone's best interests.
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