FHA and VA loans are meant to be easy for most borrowers to obtain. That was the sole purpose in creating these programs – to help our veterans, as well as non-veterans, get into a home without having the need to put down large amounts of money for a down payment or have perfect credit. Both the FHA and VA loans answered that need with their programs. They provide easy to qualify for loans that enable people from all walks of life to get into a home. The problem is that investor overlays take a hold of those requirements and rip them to shreds. Yes, the VA and FHA loan requirements still stand or the entities would not guarantee their loans, but the investors are putting more requirements on top of those, making the once easy to qualify for programs much more difficult.
Why Investor Overlays?
Investors have an obvious interest in the loans they purchase. They do not want you to default on them – an easy to understand concept. However, the problem lies in the fact that the investors are making the requirements too hard. They are doing this, in essence, to protect themselves from another housing crisis, which is also understandable, but making the loans impossible to obtain is not helping anyone, not even the investors. But because the lenders are not keeping the loans on their own books, we have to abide by the rules of the investors.
Mortgage Loan Approval Process
Just what do FHA and VA loans go through when they are originated? Here’s the process:
- The original bank starts with your loan. This is the bank that takes your application and begins processing it. They are the people that tell you what you need to provide in order to qualify for the loan. This bank is also the entity that ultimately funds your loan at the closing.
- Once the loan is funded, the bank has several choices. They can keep it on their books, which some do for a fraction of their loans. Other banks keep the loans on their books for a short period of time and then move them onto investors. If the bank decides to sell the loans, they go to an aggregator. This is the equivalent of the originator to the borrower, but for banks. The aggregator then finds the investors to take your loan or loan portfolio, if you have set up several loans into one portfolio.
The final destination for your loan might take a while to determine. You might see your loan get sold a few times along the way as well. This is all dependent on the requirements that your loan meets. For example, some investors will only take VA loans that have a debt ratio that is under 40% despite the VA’s requirements of a max 41% debt ratio. Other investors will require a certain credit score or down payment – every investor will be different.
The problem with the investor overlays is that it makes it harder for the banks to sell the loans on the secondary market. When that happens, the bank then tightens up how many VA loans it will offer, limiting your options when you are shopping for a VA loan. In the end, however, it looks like investors are lightening up. In 2013, more than 50% of the loans that were applied for were denied because of investor overlays, but that number is becoming lower and lower as time passes. Investors realize that the VA and FHA have set forth proper requirements and that the loans are not nearly as risky as they were in the past.
If you find that you are turned down by a lender because of overlays that go beyond the VA or FHA requirements, shop around with other lenders. Every lender sells their loans to different markets, so you may find other lenders that are more than willing to accept your loan application. In the end, do your homework and find the best deal and the lender with the least amount of requirements. FHA and VA loans are out there for you to have; you just have to find them.Click to See the Latest Mortgage Rates»