There's an old proverb: If at first you don't succeed, try, try again.
It's a saying that's apropos in today's mortgage world. With different lenders applying different underwriting standards, a home loan that's denied by one bank may be approved by another.
Explaining mortgage guidelines
Mortgage guidelines are the loan approval rulebook; a series of pass/fail tests. Mortgage applicants must receive passing grades for each individual "test" in order to earn an approval:
- Does the homeowner meet the minimum debt-to-income standards?
- Does the homeowner meet the minimum credit score standards?
- Does the homeowner meet the minimum equity thresholds?
Other tested traits may include the amount of time for which a person has been self-employed or "heavily bonused," their citizenship status or the applicant's mortgage-payment history.
When your underwriter is underwriting your loan, what's really happening is your loan's individual traits are being checked against a set of standards.
Mortgage guidelines are different for different loans
And this is where it gets tricky. Mortgage guidelines are different for different loan types.
A conforming mortgage, for example, (literally) conforms to the guidelines of Fannie Mae or Freddie Mac. Similarly, an FHA-backed mortgage meets the guidelines of the FHA.
While these two loan types account for more than 90 percent of today's new mortgages, don't expect your bank to follow their guidelines verbatim.
Many banks set their own approval standards above and beyond what the government requires: they're called "investor overlays."
Investor overlays challenge borrowers
Investor overlays are the tightening of minimum loan standards to improve overall loan quality. Here are three of the most common investor overlays you're sure to encounter:
1. Debt-to-income investor overlays
Fannie Mae and Freddie Mac require that homeowners' monthly debt not exceed 45 percent of their monthly income. Some lenders have reduced that limit to 40 percent. This means that approved applicants will have higher income levels relative to what Fannie Mae and Freddie Mac consider "the minimum."
2. Credit score investor overlays
The FHA's mortgage guidelines explicitly state that there isn't a minimum credit score to gain FHA approval. Lenders on the other hand, will not make FHA loans to applicants whose credit scores are below 640. So, even though the FHA has no credit-score requirement, lenders do. As such, applicants with low credit scores are often denied FHA financing.
3. "Days off MLS" investor overlays
Sometimes, when borrowers have trouble selling their homes they decide to refinance instead. Fannie Mae and Freddie Mac have a guideline for that. Homes listed for sale can't be refinanced. Mortgage applications must be dated at least one day after the home has been taken off the market. Yet, some lenders don't abide by the 1-day off MLS rule. Instead, many refinance lenders require that your home has been off the market for 60days or longer.
Investor overlays limit loan choices, too
It's not just loan traits that get the overlay treatment, either. Entire loan programs can meet the chopping block. Here are some notable examples:
Home Affordable Refinance Program (HARP): The HARP program is meant to help underwater borrowers refinance their properties without incurring mortgage insurance payments each month. However, not all lenders participate in the program when a homeowner is verified to owe more than their home is worth.
Other lenders won't participate based on a residency. For example, if you originally financed a home as a primary residence and it's now an investment property, the HARP program's guidelines will allow you to refinance, but most lenders won't.
FHA Streamline Refinance: According to the FHA's official guidelines, there is no credit check required for the FHA Streamline Refinance, nor is there a need for income or employment verification. The streamlined program has just two basic requirements: Have a recent perfect payment history to the FHA and save at least 5 percent on your payment.
Those two requirements don't stop lenders from overlaying their own guidelines, however. Nearly every lender in the country will want to check your credit score and verify that you're earning income.
"5-10 Properties Program": In 2009, the government created a special loan program for real estate investors called the "5-10 Properties Program." It was meant to give financing options to bona fide investors, allowing them to purchase and refinance their investment properties when they have more than four properties financed. The guidelines are basic and most investors meet the requirements. The problem is that few banks offer it.
Have you been investor overlayed? Here's what to do
Has your loan been denied by your lender? If it's because of investor overlays, you might be approved by applying to bank number two or bank number three.
Don't let that first denial discourage you.
There are hundreds of lenders in the U.S. and each has its own series of overlays. Some are strict while some are loose, and most can be found on Google.
If your loan has been turned down for any reason, start a search for new mortgage lenders. Your loan may be approvable--you just have to find the right bank.
Dan Green is a loan officer with Waterstone Mortgage in Cincinnati, Ohio, and the author of the nationally recognized mortgage blog, TheMortgageReports.com. Dan gives purchase and refinance mortgages for jumbo, conforming, FHA and USDA loan products. Follow Dan on Twitter at @mortgagereports.