Lender Overlays vs. Mortgage Program Requirements

Many borrowers continue to find it difficult to refinance their existing mortgage even though government programs have been introduced to make the process not only possible, but easier. As soon as these program guidelines are announced, lenders step in and put their own overlays in place which eliminates many borrowers from being able to successfully move to lower mortgage rates. The same obstacles are in place for purchase mortgages that have become harder to obtain at a time when home prices are down.

While millions of borrowers should be refinancing through HARP 2.0 and the latest FHA streamline refinance program, this is not the case because a large amount of loans are being denied. Home purchases should be soaring since the fall of housing prices, yet many have given up the possibility because of guidelines. The Federal Housing Finance Agency, which overseas Fannie Mae and Freddie Mac, and the FHA (Federal Housing Administration) are considering ways that may change this dilemma. Fannie Mae, Freddie Mac and FHA account for 90% of all home mortgage loans.

Overlays come in the form of extra fees, lower loan to values, lower debt to income ratios, larger down payments, higher credit score requirements or any other restrictions placed by lenders. While Fannie Mae and Freddie Mac will accept credit scores of 660 to 680, lenders may only take applications with scores above 700. FHA, which at one time did not have a minimum credit score, now accepts as low as 580 for their popular 3.5% down payment. Yet, lenders want way above this credit score, sometimes 100 points or more higher. The expanded FHA streamline refinance program, offering low upfront and annual mortgage insurance premiums, was designed for a fast and easy refinance transaction and requires no appraisal or credit check. On the other hand, some lender overlays may require full appraisals, full documentation, credit checks and additional fees. In addition, some lenders will only assist their existing customers with these mortgage transactions.

Many lenders are doing this to protect themselves against buybacks in the event of a default of the mortgage. By adding more underwriting requirements and program restrictions, they are trying to prevent even the slightest buyback demand from government entities. FHA approved lenders are monitored and judged when taking on high risk loans putting themselves at risk when one of these defaults. Being very conservative, even at the expense of borrowers who qualify according to agency guidelines, is now the exact opposite of what took place during the housing boom.

These occurrences are continuing to create a difficult situation for borrowers who are current on their mortgage and would like to obtain the lower mortgage rates available today. According to the Mortgage Bankers Association SVP, Steve O'Connor, lenders want several changes including specific guidance for buybacks and a specific period of time that they will be liable for defaults. Changing the current structure is a fine line to cross for Federal agencies who are looking to prevent the haphazard lending that took place prior to the housing crisis.

Since not all lenders are placing extremely restricting overlays on the mortgage products they offer for purchases and mortgage refinances, borrowers are urged to continue looking around for the lender who will assist with their mortgage needs. Technology has given borrowers an easier way to shop that is becoming very successful. Online resources have become a good option since there are usually a number of lenders in one place competing for mortgage business.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.