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What are Lender Credit Overlays?

lender overlaysIf you have been shopping around for a mortgage, you may have noticed that different lenders will give you different quotes and have different requirements.  This is due to the fact that lenders have different thresholds for risk depending on past experiences and current beliefs.  These different thresholds for risk are often shown through lender credit overlay.

What is a Lender Credit Overlay?

Essentially, a lender overlay is a set of guidelines the lender imposes in addition to the guidelines Fannie Mae, Freddie Mac, and the VA/FHA impose.  The lender does this to avoid expensive buybacks and to avoid ruining good relationships with the partners who sell them the loan.

How Could Lender Credit Overlay Affect Me?

The FHA does allow borrowers to have credit scores that are as low as 500 if the borrower can make a 10% down payment.  However, you will find that most lenders won’t allow you to have this low of a credit score and down payment.  More likely, you’ll find that lenders will require a minimum credit score of 640 for this type of down payment.  This could be due to personal preference or past experience in order to minimize risk.  When you’re dealing with lender credit overlay, you’re always going to end up with more stringent regulation because you’re dealing with two sets of regulations.

How To Handle Lender Credit Overlay

Dealing with lender credit overlay when you’re trying to buy a home can be challenging.  Know that each lender has a different credit overlay, so if you aren’t the right fit with one lender, you can shop around until you are the right fit with another lender.  One other option you have is to utilize a mortgage broker who will help you shop around for multiple lenders at once, which will limit the amount of work you have to do.  You can also focus on improving your credit score, which will help keep the lender credit overlay issue at bay.

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