 TITLE: What Are Mortgage Overlays? CONTENT: What Is a Mortgage Overlay?\n---------------------------\nFederal guidelines specify criteria borrowers must meet to qualify for home loans, but lenders are free to go a step further by implementing tougher guidelines known as mortgage overlays to decrease the likelihood that borrowers will default on their home loan.\nThese additional rules can be applied to Fannie Mae and Freddie Mac conventional loans as well as government-backed mortgage loans, including FHA, USDA and VA loans.\nMortgage overlays are sometimes prompted by unstable market conditions that increase risk to the lender. They can also result from red flags in your financial profile, the property type or the loan type you're considering.\nGenerally, you will know if you are subject to mortgage overlays when applying for a home loan. Here are examples of mortgage overlays that could affect you:\n*   **Debt-to-income ratio (DTI)**: Conventional loans typically have a maximum back-end DTI (the sum of all your monthly debt payments divided by your monthly gross income) of 43%, but some lenders require a lower DTI than that.\n*   **Credit history**: Lenders want reassurance that you can responsibly manage your debts, and thus sometimes require a minimum number of credit accounts and years of experience to qualify for a mortgage.\n*   **Employment history**: Applicants with minimal or shaky employment histories may not qualify for a home loan even if they meet other requirements.\n*   **Credit score**: Federal guidelines state you can qualify for an FHA loan with a 580 credit score and 3.5% down payment (or score as low as 500 with a down payment of 10%). Still, many lenders that issue FHA loans only consider applicants with credit scores of 620 or higher. Conventional loans are available with credit scores of 620, but some lenders set the minimum score at 640 or higher. USDA loans don't have a federally required minimum credit score, but most lenders require a score of at least 640.\n*   **Property type**: Some lenders restrict the types of property eligible for a mortgage.\n*   **Bankruptcy**: Consumers with discharged bankruptcies can qualify for home loans per federal guidelines. However, most lenders have overlays that require a waiting period of one or two years.\n*   **Down payments**: Select conventional mortgages require a down payment of 3%, but lenders don't always follow suit. In fact, some won't approve the loan unless you bring 5% or even 10% to the table. Some lenders restrict or disallow the use of gift funds, which is money you put toward a down payment that was given to you as a gift.\n*   **Cash reserves**: Federal mortgage guidelines generally require a few months of reserves to qualify for a home loan, but some lenders won't approve borrowers with less than six months' worth of mortgage payments stashed away.\n*   **Collections and charge-offs**: FHA guidelines do not require collections and charge-offs to be paid in full to qualify for a home loan, but some lenders have overlays that prevent applicants with unsettled or unpaid delinquent accounts from qualifying. END