Which Is Harder-HUD Guidelines Or Lender Overlays?

Written By: Jane Harford

The recent blogs I have been writing have been written based on actual things happening on my job as an underwriter for one of the top lenders here on the East Coast (where I live). Nothing really larger than life has been happening this week at the office, so I decided to write about one of my pet peeves on underwriting loans in these most unusual times in our business….so, my dilemma this week is………………….


Anyone who works in this industry knows that the lender guidelines, quired credit scores & needed #’s of trade lines, reserves and whatever else are not “standard” things needed on FHA mortgages. HUD has not yet required certain credit scores, ratios and required trade lines for approval. These are additional requirements added on by investors, lenders and servicers that have been burned with previous mortgage defaults, EPD’s and foreclosures. In the past year, we have seen minimum credit scores go from 580 to 600 to 640.

This requirement is now higher than the minimum required score for a conventional loan-who would have ever thought that the credit requirements for an FHA loan would be harder than those for conventional lending? The loans being approved for an FHA loan are far better risks than the loans even approved 12 months ago. When the additional requirements that are usually added for FHA loans over $417000 and for lower scores are involved, I don’t usually recognize these files as FHA loans. Again, these are the lender overlays added on top of the tighter HUD requirements.

In the past year, HUD has also tightened up on its requirements. There are no 95% lty cash out loans, very few manufactured homes being approved (lenders will not do them), the upfront mortgage insurance premium has been increased again and the down payment requirements were increased to 3.5%. However, HUD still allows 100% gift funds to be used; the borrowers can be non permanent resident aliens (with clear evidence) and non occupant co borrowers are still allowed. There are a few more requirements for a “jumbo” FHA loan (over $417000)-but not many…..

These are some of the lender overlays for FHA loans being reviewed now in many companies around the country: -All loans must be approved / eligible through HUD Total Scorecard. Few lenders are doing manual underwrites at this time. (If they are being done-they are being done at a considerable price adjustment above the normal pricing).

-All loans approved at 640 and above-if the ratios are even a minute percentage point above 31/43-there must be significant compensating factors-these factors must be taken from the list in the HUD 4155 only.

-Recently, some lenders have decided to return to approval of FHA loans between scores of 620-639-with the following caveats-

1) Ratios cannot exceed 31/43;

2) There must be a second level of review & signature by a team leader.

3) 2 months of reserves are required (cannot be gift funds).

4) If gift funds are being used-they must be seasoned for 60 days. Evidence of such must be provided.

5) Very thorough review of the HUD appraisal must be done. Internal AVM’s are being pulled to review the appraiser’s value. If there is 5% or greater variation from the value, a 2nd appraisal must be done.

6) If the property is a manufactured home, there is an automatic requirement for a 2nd appraisal to be done.

7) If the ltv is maximum financing, first time buyer counseling may be required.

8) Additional QC or further review of the file is likely-these will most likely be pulled for internal audit in the QC department as part of the required 10% audited files.

9) Field reviews are done on all QC files, EPD’s and defaulted loans.

10) Certain numbers of trade lines are now required on these loans between 620-639.

Does this sound like the FHA loans of the past? No, not at all…but because investors have been badly burned in certain areas-high LTV cash out refi’s, manufactured homes, overstated values in declining market areas, poorly documented gift funds from an unacceptable source, and overkill reviews of all HUD appraisals are now part of the approval process. Add in the newer requirements HUD established for the condo approval process, further requirements on the greater downpayment and increased UFMIP %-HUD loans look much more like conventional loans of the past.

Have the defaulted loans decreased due to these tightened guidelines? Only time will tell…..so far, the tightening of guidelines has just put the dream of home ownership further out of the reach of many people. Also, the ability to purchase a manufactured home (considered to be more affordable housing costs) is pretty much gone in the HUD world-No lender is currently doing these loans on a regular basis. Fannie Mae and Freddie Mac stepped away from MH lending a while back. These folks are pretty much left in the dust…..sad, but true….the high % of defaults on this type of housing has created this issue…..

Hopefully, as the economy continues to improve-these overlays will ease up somewhat. The change to doing 620-639 score loans is a big step back in that direction. I will come back with some further interesting issue or crisis next week. In the Meantime, look at the guidelines/overlays that you have to review and approve to-which is the harder set of rules to follow? For me, it is clearly the lender overlays….HUD has made some good solid changes, but they are still easier to review to than the overlays that our lenders are insisting that HUD loans be underwritten to. Until then, happy fraud free underwriting!

About The Author

Jane Harford - As an NAMU® volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMU® , please email us at: contact@mortgageprocessor.org.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.