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What are the current lender overlays on FHA insured 30 year mortgages, credit score, DTI?

We have just started our home search (we currently rent), but before we get too far down that road I was wondering can someone give me some details on the lender overlays on FHA backed mortgages today, minimum score, DTI, downpayment, etc. 

My middle score is 675 and we're looking at homes around 400k. We currently have $15k saved and expecting to save about $2,000 more in the next couple months. We could buy at any time if we found something we really like...

Realizing the mortgage industry has changed alot (to put it mildly) since we last bought in 2006, just trying to get some information so are better informed buyers. Thank you mortgage gurus.
  • January 06 2012 - Baltimore
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Answers (8)

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I heard that there were over 200 changes (about 1 per business day) to mortgage law.  When you say things have changed, you aren't kidding!

FHA requires a 3.5% down payment, this can be gifted by a family member. On a 400K loan, $14000, so you are looking good there.  The seller can pay up to 6% toward closing costs and prepaids (taxes, insurance, interest).  The monthly mortgage insurance has increased on FHA loans to 1.15% (up significantly) and the up front mortagage insurance is now 1%, that is typically financed into the mortgage.

The mortgage calculators available online don't take a lot of these factors into account, so beware.  We have created an easy to use excel spread sheet for our clients to use to estimate closing costs and monthly payments.

Your credit score may be different if pulled by someone other than a mortgage person, since consumer and other credit scores use different algorithms for calculations.  I have seen scores go up or down by about 70 points. That can make a difference to your loan qualifications.  It is a good idea to get pre-qualified before you find something you "really like".

Also you said "My middle score" and "we are looking"...the loan will be based on the lowest middle score of all borrowers on the loan. That means if your score is 675 and the coborrower's middle score (if needed for qualifying) is 500, there will be work to do before you can realize your dream of buying. 

It sounds like you are on the right path.

Warm Regards,
Maryland Mortgage Mama

  • January 06 2012
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Just to clarify, and overlay is a rule or restriction over and above what FHA (or FNMA, FHLMC, etc.) rules allow.  The biggest problem with overlays is it's not like they are universal or consistent.  On the contrary, they are often strange and sporadic.  Based on what you posted you really shouldn't have much trouble qualifying to buy, but that doesn't mean overlays won't be an issue. 

What you will be most likely to have problems with will relate to the home you want to buy.  Things like unpermitted improvements, property flipping, property condition or appraisal requirements will be the things you need to watch out for.  The important thing is that not only do you need a good lender who will do the research (any loan officer out there who says they know it all is a fool,) you need a good Realtor who will be able to identify potential issues and run them by the lender as early in the process as possible.

  • January 06 2012
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Nelson,
You are fortunate that AKA Chuck "sugar coated" his response to your post....... you should have seen one of his previous "in your face" ones.
  • January 06 2012
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Thanks Professor, that was strange.
  • January 06 2012
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" An 'overlay' implies - what a lender will charge over and above their rates in fees - for borrowers with specific qualifications."

I suggest you learn what "overlay" means because you are way off base. An overlay implies no such thing, it implies that in addition to FHA guidelines the specific lender has added certain rules or restrictions which may or may not be related to rate or fees. An example of a non rate / fee related overlay would be a credit score requirement. FHA allows down to 500 with 10% down and to 580 with 3.5% down. 

If you are going to pimp your community lending as being the best, you may want to brush up on the knowledge a bit so you don't look silly.
  • January 06 2012
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An 'overlay' implies - what a lender will charge over and above their rates in fees - for borrowers with specific qualifications. Try to find a community lender with a program up to 97% as a comparison to standard FHA. Your credit score should allow you to negotiate with a lender that quotes rates without overlays - YES, we exist. A rate is a rate. The qualification becomes the issue. You have an acceptable credit score, and hopefully with a GREAT realtor you can negotiate a price where the seller can take some of the costs. The 97% guidelines for Mortgage Insurance (conventional are) DTI's less than 41% - minimal credit score 720 - 97% MI is available - not for condo's or 2 units. Work on your credit score - you may have a quick fix. HUD has free credit counseling available - and many lenders have rapid credit score programs.
  • January 06 2012
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Your credit score should be fine, which most have a minimum of 640 (while many are also will go lower).  It's usually best to go with a DTI of 45%, but most lenders will go higher (I've seen it go as high as 57%).  Clay is right about not really pushing the DTI limit.  It's not fun trying to send most of your paycheck every month to the Mortgagor.  Good luck with your search!
  • January 06 2012
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I think the DTI ceiling will vary from lender to lender. I believe my DTI cap with a score under 700 and DU approval is 50%. IMHO, you are better off not to push the DTI to the limit, being "house poor" is no fun.
  • January 06 2012
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