Thursday, January 20, 2011

Underwriting Overlays

Here's all you need to know about underwriting overlays.

What is an underwriting overlay?

• Fannie Mae, Freddie Mac, FHA, and VA have underwriting guidelines that all lenders must follow if the loan is going to be sold to, insured by, or guaranteed by them
• Lenders are allowed to add their own, more restrictive underwriting guidelines on top of these guidelines
• The additional guidelines are called underwriting overlays

Why do overlays matter?

• The loan must be underwritten according to the most restrictive guidelines
–If the loan is going to Fannie Mae and Fannie Mae has the most restrictive guidelines, the Fannie Mae guidelines are the real guidelines.
–If the individual lender has more restrictive guidelines than Fannie Mae, then the lender’s guidelines are the real guidelines.

Some Examples of Overlays

• Fannie Mae has a minimum credit score of 620, but the lender has a minimum score of 640. 640 is the minimum score allowed!
• Fannie Mae allows a maximum debt-to-income (DTI) ratio of 50%, but the lender has a maximum DTI of 45%. 45% is the maximum DTI allowed!

What about mortgage insurance?

• Mortgage insurance companies have their own underwriting overlays.
• If the mortgage insurance overlays are more restrictive, then they are the real guidelines.
• Mortgage insurance guidelines are almost ALWAYS more restrictive than the lender’s or Fannie Mae’s
• FHA loans do not have mortgage insurance overlays

Why do loans fall apart?

• A conventional loan with mortgage insurance needs to be underwritten to Fannie Mae’s, the individual lender’s, and the mortgage insurance company’s guidelines.
• If the loan officer only looked at the Fannie Mae guidelines, then they only did one-third of their job.
• Loan officers must check ALL the guidelines, or the loan might fall apart and not close.

How do you protect yourself?

• Ask your lender if they check all three sets of guidelines before giving you a pre-approval.
• If they don’t know what you’re talking about – dump the bum. They are no good.
• Underwriters do not make up guidelines. Everything is written down for everyone to read.
• Your lender needs to read the guidelines!!! Loan approvals are easy if you read.

Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

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