Most of the mortgage companies have overlays on their products. An overlay is an additional requirement added on top of a FHA, VA, or conventional mortgage guidelines. One example is FHA allows down to a 580 credit score if you want to put down 3.5% down payment. 95% of the lenders state you must have a 640 credit score and about 4% will allow a 620 credit score to even do an FHA loan. This is an overlay. We do not have any overlays on our FHA, VA or Conventional mortgages.
Banks, Credit Unions, Mortgage Banks and most Mortgage Brokers cannot do an FHA mortgage unless the customer has a 620 credit score. The same holds true for a VA & Conventional mortgages. These mortgage companies state they want to make sure they can sell their loan to the secondary market. Here is what is so interesting FHA says they will allow down to a 580 credit score with 3.5% down payment and you are allowed even a 500 credit score with 10% down pmt. VA does not have a min. credit score and neither does conventional loans. Most of the banks, credit unions, mortgage banks and mortgage brokers only use something called automated underwriting (DU or LP), if the loan does not get approved through their system the loan is denied. Conventional loans do offer manual underwriting but I have never seen it. FHA & VA offer manual underwriting and only a few companies in the country will actually follow the manual guidelines. We have access to FHA manual underwriting up to a 50% debt ratio, with compensating factors, and the same with VA manual underwriting. I believe these overlays are hurting the purchase market and will continue to affect home sales in the future. These are just some examples of overlays. If you get turned down at first check with some other mortgage lenders, there is a good chance you will be approved.