Before the housing crisis, mortgage insurers had few underwriting criteria. They largely accepted the decisions of automated underwriting systems from Fannie Mae and Freddie Mac. If your application was accepted and approved by these systems, insurers would pretty much rubber stamp those decisions and issue policies. Of course, when people began defaulting on their home loans in droves, insurers (the few that remained in business, anyway) decided that they needed to look after their own interests and began imposing overlays on top of the requirements of mortgage lenders.
When the mortgage crisis was in full swing, it was common knowledge in the mortgage lending industry that if you didn’t have a down payment of 20 percent or more, you had to go with an FHA mortgage or keep renting. Mortgage insurers, reeling from record-breaking losses, excluded certain kinds of homes (chiefly condos, manufactured houses and and multifamily buildings), homes in certain places (Miami, Vegas and Phoenix, for example) and certain kinds of borrowers (anyone not wearing a halo). Even applicants who supposedly met the mortgage insurer’s guidelines found themselves turned down for the flimsiest of reasons.
Eventually, housing markets stabilized, and mortgage insurers came up with more reasonable requirements. Minimum credit scores ranged from 680 to 740, and more homes in more places became eligible for insurance. This was a good thing, too, as FHA mortgage insurance premiums underwent repeated hikes over several years.
Today, one of the larger firms, MGIC, announced that it’s dismantling most of its overlays. The new requirements are nothing short of incredible.
Prior to the changes, loans with LTVs of 97% required a 680 or higher FICO; and those with an LTV of 95% or below required a minimum credit score of 660. Now, with a maximum LTV/CLTV of 97%/105% (yes, that’s right — your combined first and second mortgage can exceed 100 percent!) and a minimum credit score of 620, you are theoretically insurable. MGIC also allows cash-out refinancing with up to $150,000 cash to the homeowner.
Previously, MGIC had separate overlays for primary residences vs. second homes; now they are the same.
Additional overlays used to be required if a person was using gift funds or had a DTI (debt-to-income ratio) of 41% or higher Now the company allows the lender to only provide whatever documentation is required by the automated underwriting systems.
This welcome easing of overlays should make it easier on applicants. Automated underwriting system approvals can more readily be relied upon — with overlays, an approval from your lender isn’t worth much, because your application and documentation would still have to be submitted to and approved by a mortgage insurer. Taking out much of that makes things easier for lender and borrower.