Just because the FHA or VA has certain requirements doesn’t mean that every lender will follow them. Sometimes lenders add what they call ‘overlays.’ These are just more rules that you must follow in order to get the loan. Sometimes it can make it harder to qualify for the loan that you thought would be a cinch to get.
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So what can you do to get around these overlays? Keep reading to learn the top tips.
Shop Around for a Different Lender
You don’t have to use a specific lender for any type of loan. You are free to shop around and find the lender that suits your needs the most. For example, if you have a 590 credit score and you want FHA financing, some lenders may decline your application for the low score even though it falls within the FHA’s guidelines. If you shop around, though, you may find a few lenders that will accept your lower score.
We recommend that you shop with at least three lenders to get a good feel for what lenders want. If you don’t find the right lender after just three lenders, keep shopping until you do. There are literally thousands of lenders out there; you just have to apply with them to see if they will offer you a loan.
Offer Other ‘Good Factors’
Sometimes lenders are willing to overlook ‘bad’ factors if you have other ‘good’ factors to make up for it. For example, if a lender wants a 620 credit score on an FHA loan, but you have a 600, they would normally decline your application. Now let’s say along with that 600 credit score, you have a 28% housing ratio and 31% total debt ratio. Those ratios are much lower than what the FHA allows. The lender may see the lower debt ratio as a much lower risk of default, allowing them to approve your loan.
Each lender looks at compensating factors differently. For example, one lender may allow a higher debt ratio if you have a high credit score while another may not think the high credit score makes up for the risk of a high debt ratio.
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In general, you can expect some lenders to look at the following as compensating factors:
- A debt ratio lower than the program allows
- A credit score higher than the program requires
- Money on hand to be used as reserves (money in a savings or checking account)
- Steadily increasing income
- Holding the same job for longer than 2 years
- No late payments, collections, judgments, or bankruptcies in your past
- Put Money Down on the Home
Even if the loan program doesn’t require it, make a down payment on the home. Nothing makes a lender feel better than you having your own money invested in the home. If you can put more down on the home than the program requires, you automatically lower the risk for the lender.
Lenders put a lot of value in down payments because they put your own money at risk. You are more likely to make your mortgage payments on time if you know your own money is at risk. For example, let’s say you invest $20,000 of your own money into your home. You probably wouldn’t’ want to lose that $20,000 so you would do what it takes to make your payments on time.
Lenders call this your loan-to-value ratio. The lower the LTV, the less risk the lender faces. If you can put money down on the home either from your own money or as a gift from a relative, do it, as it will increase your chances of getting around lender overlays.
While it can be frustrating to come across lender overlays and be unable to get approved for a loan, there are ways around it. You have to be patient and take the time to shop around. If you have compensating factors that you can use to convince the lender to lend to you, your chances of approval will become even higher.
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