Dennis' Mortgage Blog

Question of the week:  What is an overlay? How does it affect my loan application?

Answer:  Every mortgage product has guidelines, the rules by which the application is underwritten to determine if it is approved or declined.  Since about 90% of mortgages funded are conforming or FHA.  That means that either Fannie Mae and Freddie Mac for conforming loan or FHA provides the guidelines for the mortgages they either buy in the case of Fannie and Freddie or insure in the case of FHA.

If a loan is underwritten to the guidelines specified for income, assets, property, occupancy, etc then and approved it will be purchased by Fannie Mae or Freddie Mac, aka a GSE (Government Sponsored Entity).  These guidelines established by the GSEs are the minimum standards for loan approval, lenders have the ability to have stricter guidelines and in many, or most, cases do.

For instance, Fannie Mae may approve a loan where the assets required for the file are verified with a Verification of Deposit (VOD), many lenders however will require two months bank statements showing all deposits and withdrawals.  Why does this matter?  A VOD will show the current balance and the average balance for the past two months. 

If during the two month period you received say $3000 from your brother and sister for a birthday gift for your dad and then spent the money on the gift your current and average balance would be unaffected as reported on your VOD.  If you show two months bank statements the underwriter will see your deposits from your brother and sister and want them sourced (copy of cancelled checks from your brother and sister), explained and possibly require a gift letter from each of them.  As I have written many times in updates over the past few years asset verification and deposits are a primary source of loan problems and in many instances mortgage applications being declined.  In this instance the overlay from the lender requiring bank statements instead of allowing for VODs to verify funds can jeopardize your loan application.

For income for a self-employed borrower whose income declined from 2009 to 2010 FHA regulations state such income is not allowed if the decline is “substantial,” a word that can have broad meaning.  To avoid being denied insurance on a funded mortgage many lenders have an overlay that they will not approve any declining income, “substantial” or not.

Debt-to-income ratios, loan to value limits, amount of reserves required, are all areas where different lenders may have different overlays that could turn what looks like a very solid mortgage application into a declined application.  Because of the myriad of overlays on different portions of the application package, from credit to income to assets to property and because every loan application is slightly different—particularly in Southern California—very few applicants will not be subject to some type of overlay criteria of which your mortgage originator needs to be aware. 

Refinances or purchases, conventional or FHA, mortgage insurance or no mortgage insurance, condo or detached single family home, gift funds or no gift funds, until we know every aspect of your financial information required for a mortgage application we are not entirely sure of which of the several lenders we are fortunate to work with will approve and fund your mortgage.

Which brings up one of the best reasons to use Stratis Financial for your mortgage needs.  Many real estate agents or potential clients ask, “are you a direct lender?”  We are able to answer, “Yes…” because Stratis Financial funds approximately 80% of its mortgage volume in our own name.  But thankfully for that other 20% we have the ability to broker mortgages to other lenders who have different overlays and guidelines that allow us to fund mortgages other lenders and brokers may not be able to fund.

Unless you have all W2 salary income, all your funds are in your own bank account and have been there for several months, your subject property is a single family detached home in a developed neighborhood, your seller is a “regular” seller and not a bank, and you have low debts and great credit scores, assume you may be subject to some overlays on your mortgage underwriting.  To avoid being impacted by overlays make sure when discussing your financial information with your mortgage originator you hold no information back and disclose everything.

What are overlays and how do they affect your mortgage application?  They are stricter underwriting guidelines for specific aspects of your mortgage application that could require more paperwork, more evidence and possibly could jeopardize your mortgage approval to refinance your existing mortgage or purchase your new home. 

The best way to avoid having overlays impact your mortgage approval? Use an experienced professional who knows what questions to ask and what information to get.

Have a question for me?  Ask me!

Maximum conforming loan limit is now $625,500. 

While Irene did have some impact, and its impact continues to trouble many Vermonters, we can be thankful it was not as bad as many in the media were suspecting (one gets the creepy feeling however that some in the media were disappointed they were not reporting on a bigger natural disaster).  As a result financial markets were minimally impacted by the impact of the storm. 

This week has had some mixed economic news.  Consumer spending increased, but consumer confidence plummeted.  Housing prices in June appeared to stabilize, but the number of purchase mortgage applications have dropped.  The number of first time unemployment insurance claims dropped from the prior week, but the total remained over 400,000.  The result of the mixed news was a somewhat mixed week for bonds but general positive as investors reacted more to the negative economic news than the positive.

The biggest news of the week however is today’s employment numbers for August.  Weak is a bit of an overstatement.  The Department of Labor announced that the economy added no jobs in the month of August, the weakest job report since September 2010.  Further compounding the bad news for economic recovery was the revision to June and July employment numbers downward by 58,000 jobs. 

Bad news is good news for mortgage rates and the bond markets reacted predictably to the news. With the downward revision in August to 1^st Quarter GDP to almost no growth and the declining employment numbers many fear the double part of double dip recession has started.  Note that there are those who feel that we have never come out of the prior recession that was technically ended in June 2009.

I hope President Obama’s speech has not yet been written.  Having hyped his major speech to a joint session of Congress next week, the White House is most likely making severe revisions in light of the Labor Department’s announcement today.  Keep in mind as you listen to the President’s speech that going into the summer of 2009 the economy appeared to be turning around and beginning recovery.  This was before any of the approximately $800 billion in stimulus spending hit the economy, before ObamaCare was passed, before Dodd-Frank was passed and before government agencies from the Treasury to HUD to the Federal Reserve (I know technically not a government agency) to the National Labor Relations Board to the Securities and Exchange Commission to the Department of Labor and every other federal agency began issuing regulations and policies on American businesses.

Bipartisanship on how to generate economic growth is impossible.  There is a fundamental and philosophical divide between the White House and Senate majority and the majority in the House of Representatives on the government’s role in spurring on the economy.  Right now “bipartisanship” means that one side will have to abandon its philosophy and policies it feels will help create jobs and economic growth.  It is akin to asking a vegan and a steakhouse chef to collaborate on a meal they both would eat.  Expect more of the same policies from President Obama next week being cheered on by his party and rejected by the other. The stalemate will continue until January 2013 when swearing in ceremonies take place in Congress and the White House showing which side the people voted for to break the deadlock in November 2012.

In the meantime the economic data portends continued low rates for those looking to purchase or refinance property.

Rates for Friday September 2, 2011: Rates stable from last week for a few reasons, one lenders are holding the line on rates to control volume flow and avoid some of the capacity issues of last Fall, two they don’t want to get caught with their rates down should there be a sudden move up.  As for government, they have bottomed out and the rate stays the same but the pricing improves at the rates quoted.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               3.875%             Flat

30 year high-balance conforming           4.00%               Down 0.125%

30 year FHA                                         3.75%               Flat

30 year FHA jumbo                              3.875%             Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

As regular readers are aware this final section of the Weekly is usually personal, few more so than this week.  First some tragic news for the Stratis Financial family as Alberto Pineda husband of original employee Alma passed away suddenly last Saturday morning from unknown causes after taking a run with his two boys.  Alberto always had an infectious grin and smile whenever I saw him and was a kind man with a big heart.  In a small company a family type community develops and our hearts ache for Alma’s loss.  A sad reminder that every day is precious and every moment with our children and loved ones is unique and special.  Hug your kids, tell your spouse you love them and please put the Pineda family in your prayers this weekend.

As for my spouse, I proud as can be to celebrate our seventeenth anniversary on Sunday, thankful always that she agreed to take this journey with me.  A wonderful wife, great mother and friend, Leslie has many talents that amaze me, among them her writing ability as demonstrated by her children’s story that was printed in the Los Angeles Times on Sunday, click to read The Clown Noses.

Have a great Labor Day weekend,

Dennis