Showing posts with label assets. Show all posts
Showing posts with label assets. Show all posts

Mortgage Overlays Explained

Overlays Explained


Kentucky Mortgage Overlays




What’s an Overlay? An Overlay is a mortgage industry term that highlights an additional qualifying requirement(s) beyond what the guidelines issued by Fannie Mae and Freddie Mac. FHA, VA and USDA loans can also have overlays. These guidelines are set forth for several reasons, but one is to provide lenders with mortgage program stability as well as allowing lenders to sell loans, either individually or ‘in bulk.

Think about that for a moment. If there were no secondary market at some point the mortgage company would run out of money to lend. When a lender makes a loan, it draws down some money from its credit line and replenishes that credit line once the loan(s) is sold. This process occurs over and over again.

Overlays can also be used to target a specific type or class of borrower. To reduce risk, a lender might ask for a greater down payment than is originally required. Let’s look at credit scores as an example. While Fannie might ask for a minimum credit score to be 680 a lender might decide to up the ante a bit and set the minimum score at 700.

Catering to different groups means catering to a particular market or class of borrower. One lender may continue to stand firm with a 680 score while another decides 700 is better. Many borrowers may not know about this dynamic. This can mean applying for a mortgage at a mortgage company, getting declined and thinking that all lenders are the same and stop their search for a new home. All they really needed to do was to continue shopping for a lender who would approve the very same loan, just without the harsher overlays.

If a lender asks for a 680 score your loan officer will know where to send a loan with a sub-700 FICO. These overlays can be placed on both conventional as well as government-backed mortgages. The government-backed mortgages are those underwritten to FHA, VA and USDA program guidelines.

Overlays can come and go over time. A lender might set forth a new overlay and then a year later remove it or even enhance it. It’s completely up to the individual lender as long as the loan is approved using established guidelines. What lenders can’t do is weaken guidelines. There are no overlays to drop the minimum score requirement from 680 to 650, for example. Doing so would mean the mortgage didn’t meet program guidelines and the loan could no longer be sold. Overlays help protect the lender while at the same time providing borrowers with additional choices.

Finally, lenders can’t dilute loan program requirements. In other words, lenders can’t apply an overlay to lessen the requirements. Reducing approval requirements means the loan won’t have the minimum features that secondary markets require. If a lender does in fact reduce the requirements the loan can still be made, it’s just that the lender can expect to keep the loan in its own possession for the life of the loan.


One important concept you should familiarize yourself with is the “lender overlay,” which is essentially an expanded guideline (or set of guidelines) on top of what Fannie Mae, Freddie Mac, or the FHA/VA will allow.

Think of it as a second coat of paint, applied after the primer. The primer is the bare minimum necessary, but you don’t see people driving around too often without that second coat.

The same goes for mortgages. Fannie Mae, Freddie Mac, and the FHA/VA all set underwriting guidelines for residential mortgages, but they don’t actually lend directly to consumers.

Their job is to purchase and/or securitize the home loans that fit their guidelines, which is why they exist to begin with. Essentially, to keep the mortgage market liquid.

By doing so, lenders are able to sell their loans more easily, knowing they fit certain pre-determined criteria, which allows them to originate more loans via that increased liquidity.


Written by David Reed for www.RealtyTimes.com Copyright © 2022 Realty Times All Rights Reserved. Reed is from Austin, Texas and is the author of The Real Estate Investor’s Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. A Senior Loan Officer and Mortgage Executive for more than 20 years, he has also appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show.

WHAT DOES IT TAKE TO GET QUALIFIED FOR A KENTUCKY MORTGAGE LOAN IN 2019?

Qualifying for a Kentucky Mortgage Loan IN 2019?





To some potential buyers, particularly first-time buyers, the prospect of meeting a mortgage lender may seem a little scary. Lenders ask a lot of questions because they want to help you get a mortgage. If you work with a lender before you decide on a home, you will know whether you’ll qualify for a mortgage large enough to finance the home you want.

It may seem that your lender needs to know everything about you for the application, but actually, all the lender needs to know about is employment, finances, and information about the home you’re buying (but you can be pre-approved before you choose a home). You will, however, need to provide quite a few details about these topics. The goal is to arrive at a monthly payment you can afford without creating financial hardships. Here's an idea of what lenders consider when they are qualifying you for a loan:


Your household income and expenses


Lenders look at your income in ways other than the total amount; how you earn it is also important. For example, income from bonuses, commissions and overtime can vary from year to year. If these sources make up a large percentage of your income, your lender will want to know how reliable they are.Your lender will also consider the relationship between your income and expenses. Generally, your fixed housing expenses (mortgage payment, insurance, and property taxes, but not repairs or maintenance) should not be more than 28 percent of your gross monthly income, although this is not an absolute rule. Your lender will also consider other long-term debts, such as car loans or college loans. It is a good idea to bring the following when you meet with your lender:


Income
  • Employment, salary and bonuses, and any other source of income for the past two years (bring your most recent pay stub, previous year’s W-2 forms, and tax returns if possible)
  • The most recent account statement showing the amount of any dividend and interest income you received during the past two years
  • Official documentation to support the amount of any other regular income you may receive (alimony, child support, etc.)
Job stability is a factor that a mortgage lender will look for, and two years at your current job helps, but this also is not an absolute requirement. If you change jobs but stay in the same line of work, you should not have a problem — especially if the job change is an advancement or increase in income.

Credit score


Your credit score also helps to predict how likely you are to repay the mortgage debt. Credit scores will determine if you qualify for the loan, what your rate is, and mortgage insurance payments each month. Typical fico scores wanted for an automated approval run around 620 for an FHA loan and VA loan, 640 for a USDA, 640 for a KHC Loan with Down Payment Assistance, and 620 for an AU approval for Fannie Mae Loan.


Personal assets


  • Current balances and recent statements for any bank accounts, including checking and savings
  • Most recent account statement showing current market value of any investments you may have, such as stocks, bonds or certificates of deposit
  • Documentation showing interest in retirement funds
  • Face amount and cash value of life insurance policies
  • Value of significant pieces of personal property, including automobiles
  • Debt Information
  • The balances and account numbers of your current loans and debts, including car loans, credit card balances and any other loans you may have

Underwriting


The lender does the best possible job of ensuring that a borrower qualifies for a loan. The final decision, however, rests with the lender's underwriter, who measures the total risk that the specific investor, who backs up the loan, is taking. Each investor (or investment company) has its own underwriting guidelines (often using statistical models), so while the underwriters evaluate many of the same factors as the lenders, they may look more closely at some areas than others, depending on the guidelines. For example, while the lender may have pre-approved you before you chose a home, by the time you get to underwriting, you will have chosen the property you want to buy, and the underwriter will review the property details closely.However, most of the information used is the same as that used by the lender, but it may be evaluated differently. The underwriter will evaluate the borrower's ability to pay (income), willingness to pay (credit history), and the collateral (property). As underwriters analyze each of these risks (although this is not a complete list), here are some possible guidelines they may use:
 


Income



   Is the income sufficient to repay the loan? Ratio guidelines of 31 percent payment-to-income and 43 percent total debt-to-income are standard, but some programs allow for higher ratios.  This is the typical manual underwrite for a score that does not fit the current Automated Underwriting Engines used for Fannie Mae (DO), FHA, VA, USDA and Rural Housing (GUS)
  • Is the income stable from month to month and year to year?
  • Has the borrower been on his/her current job and in the same industry for a sufficient amount of time? A minimum of two years is the standard guideline, but exceptions can be made.
  • Can the income be verified?

Credit
  • Does the borrower have a good credit score-Typically 740 or higher will yield the best rates and lowest mortgage insurance for a conventional loan? FHA mortgage insurance and VA mortgage insurance is the same no matter what your credit score is. 
  • Does the borrower have late payments, collections, or a bankruptcy? If so, is there an explanation that can be provided for the late payments/collections/bankruptcy? FHA, VA requires 2 years removed from bankruptcy and USDA requires 3 years removed from bankruptcy. 
  • Fannie Mae requires 4-7 years after a bankruptcy. 
  • Does the borrower have excessive monthly debts to repay? Typical Debt to income ratios for a no money down loan are limited to 45% of your total gross monthly income for a USDA or KHC loan. 
  • Is the borrower maxed out on credit cards? Pay down your credit card balances to less than 25% of your credit limits before you apply for a mortgage loan. 


Collateral


Is the property worth what the borrower is paying for it? If not, the lender will not loan an amount in excess of the value. If the appraisal comes back less than the offer on the house, sometimes you can renegotiate the terms of the purchase contract with the seller and his/her real estate, agent.Some borrowers agree to purchase the home at the price they originally offer and pay the difference between the loan and the sales price. You need to have the disposable cash to do this, and you should assess whether the property is likely to hold its value. You also need to consider the type of loan for which you have qualified. If you need to move suddenly and have a large loan relative to the original value, and the property has not held its value, you could face a difficult cash shortfall when you go to pay off your loan.Is the property an acceptable type of property, and does it meet coding requirements and zoning restrictions? Is the property comparable to other properties in the area? Surveys are common and are used to get an accurate measurement of the land that goes with the property you are purchasing. The person who prepares the survey should be a licensed land surveyor. The survey shows the location of the land, dimensions of the land and any improvements.Encroachments are improvements to the property that illegally violate another's property or their right to use the property, such as building a fence that is actually on your neighbor's property instead of yours, or constructing a building that crosses from your property to another’s property without their permission. Evidence of encroachments can slow the final approval process.


The downpayment


A downpayment is a percentage of your home's value. The type of mortgage you choose determines the down payment you will need. It can range from zero to 20 percent, or more if you wish.A number of loans are available that do not require high down payments, particularly for first-time home buyers. FHA loans, for example, may require less than 5 percent down, and veterans or those on active duty in the military can obtain loans with no down payment at all. USDA loans are offered to rural home buyers with a no down payment option just like VA loans.In addition to down payment assistance offered through Kentucky Housing where you don't have to put a down payment down with income caps for both KHC and USDA loans.These programs may have less strict guidelines for loan approval, such as allowing a higher ratio of payment to income or debt to income. They also may accept alternative forms of credit history if you have not established credit through traditional means — credit cards and car loans. For example, a lender could look at the history of utility payments and rent payments to determine credit worthiness.


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-- 
Joel Lobb
Mortgage Loan Officer
Individual NMLS ID #57916

American Mortgage Solutions, Inc.
10602 Timberwood Circle 
Louisville, KY 40223
Company NMLS ID #1364


Text/call:      502-905-3708
email:          kentuckyloan@gmail.com