The U.S. Department of Veterans Affairs lists specific guidelines, that borrowers and lenders must follow, to be eligible for government backing on a home loan.
As a borrower, you must have sufficient income to buy a house and still have money left over to pay bills and purchase food for your family. You must also be considered to have satisfactory credit.
Lenders must also follow guidelines regarding how large of a loan they can offer to a prospective home buyer.
While these regulations are fairly broad, you may discover that the lenders you work with have more stringent requirements in place for you to meet.
Why Do Lenders Use Overlays?
Overlays are conditions lenders require above and beyond VA loan guidelines.
When you apply for a VA home loan, it is important to understand that the government is not the entity that is loaning you money.
Instead, the government merely backs the loan, which serves as a form of insurance to lenders that lets them know that they will be paid some money back if you default on the loan.
Since lenders have this reassurance that they will be compensated for at least a portion of the loan, they tend to be more lenient with their requirements.
This allows you to enjoy benefits such as being able to avoid putting a down payment on your home, or having to buy private mortgage insurance.
However, a mortgage loan company still knows that it is far better to carefully vet each applicant to avoid having to rely upon the VA backing. Plus, they still lose money on the loan when a person fails to make their house payments.
Therefore, you will notice that they all have separate guidelines in place that affect whether or not you are considered to be eligible to get a loan.
What Types of Overlays Should I Expect?
There are many different types of overlays that lenders create. Lenders also tend to change their overlays periodically in response to the current market.
You should also know that overlays can vary significantly among lenders since they all have differing practices for issuing loans.
One of the most common overlays that you will encounter is one that stipulates that a lender can only issue a loan to people with a specific credit score.
You may also find that lenders have overlays that require you to fit within a certain debt-to-income ratio.
These overlays tend to be fairly common among lenders, and they are designed to make sure that you are responsible and capable of paying back the loan.
You may also encounter overlays that relate to having a co-borrower on the loan. In most cases, the lender will look at both of your credit histories, and having a co-borrower with a higher credit risk may impact your ability to get approved for the loan.
What Is the Best Way to Deal With Overlays?
It is sometimes hard to find out what the different overlays are that are issued by lenders.
Our loan specialists will look at the overall big picture regarding your financial history and eligibility as a service member. This way, you can be proactive about things such as meeting the credit score requirements so that you look better to lenders.
Lender overlays may seem like just another roadblock on your way to secure a loan, but they do not have to be. Understanding how to meet these additional guidelines helps you to make a plan that demonstrates that you are an ideal candidate for receiving a home loan.