Why is the word 'Overlay' important to know?

Reblogger Marney Kirk
Real Estate Agent with Cummings & Co. Realtors

Thank you so much, Khash, for this information.

Overlay is an important term to know and understand!

Original content by Khash Saghafi NMLS Originator NMLS ID 120117

"Overlay" is a word which real estate agents need to learn.  What does it mean and why is it such an important word to learn? Easy. It is the reason why some lenders will approve a loan while others will decline it.


Lending begins at the BACK of the line and NOT the front of it. There are 3 players involved in a mortgage transaction. 

  1. The Borrower
  2. The Lender
  3. The Investor

The Borrower is the one GETTING the Loan, the Lender is the one GIVING the loan and the Investor is the one BUYING the loan.


Lenders GIVE loans to buyers and then SELL them to investors. My company, Wells Fargo, Bank of America and Quicken Loans are "Lenders" (call me biased, but mine is the best out of all of them!! lol).  Fannie Mae, FHA, VA and USDA are "Investors".


This is a super, super important concept which agents must learn -- Lenders will not GIVE a loan which they cannot SELL to investors.  Let me say that again -- Lenders will not GIVE a loan which they cannot SELL to investors.


The investors come to us (the Lenders) and tell us what they will buy from us by giving us a set of "guidelines".  We then apply those guidelines and give loans out to borrowers.  After giving the loan to a borrower, we then turn and SELL the loan to the investor.


To make 1,000% sure that the loan we gave will get PURCHASED, lenders will "OVERLAY" the investor guideline and make the guideline MORE restrictive in order to make sure that the loan will get bought.


As an example, did you know the following?

  • FHA goes down to a 500 score.
  • You do not even have had to have started your new job and you can get a mortgage (while having NO job)
  • ALL of the money could be gifted to a borrower for the down payment on a conventional or FHA loan
  • You can actually be IN foreclosure right now and still get a conventional loan


The easiest example to illustrate "Overlay" is the FHA score.  Many lenders will tell you that you need to have a 620 or 580 or 640 to go FHA.  No you don't. FHA goes down to 500, whomever you are speaking to simply applied an OVERLAY to the score requirement and made it 640.


I was told yesterday by a loan officer that if the score is below 660 at his company for FHA, you need to get cancelled rent checks from the borrower to qualify.  That is an OVERLAY.


The same loan officer told me that for conventional loans, his company does not allow someone to get a mortgage if they have any late payments following their bankruptcy.  That is an OVERLAY.


Even though I understand them, there are multiple problems with overlaying investor guidelines.  One involves Fair Lending (which is a separate conversation) and one is the confusion it causes for the loan officers.


Next time a borrower gets declined by a lender whom you are working with, ask the lender, "Is that an OVERLAY or is that your guideline?".  If it is an OVERLAY, send the borrower somewhere else.  The scary thing is that most loan officers do not know the difference between the two, so they might not even know themselves.


If you have borrowers who need to get qualified and you do not want to deal with overlays and you want immediate answers, give me a call at 1-216-780-1103 or shoot me a text.  My company has no overlays to our investor guidelines which means that your borrowers get the best shot at getting a loan when they come to me.  I am licensed in 14 states, but I can answer questions or scenarios for you no matter where you are.  What is better than my knowledge of guidelines is my service -- I answer my phone 7 days a week.  Everyone says it and I deliver it.  I am also an underwriter and I own the company -- see how many loan officers you talk to who can say that.  I love difficult transactions and I absolutely love working with people who were declined somewhere else (especially at Zero hour).  I LOVE those deals!! Call me with your declined borrowers and let's see what we can do.  You will be surprised at how many people with good credit or recent job changes or gift money actually qualify, but were declined due to an overlay.






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Mercedes E. Santana
Santana Property Group - New York, NY
NYC Multifamily Properties


You detailed explanation is spot on. I doubt most agents have ever heard of the term. Thank you for posting.

Jul 08, 2018 08:41 AM #1
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Marney Kirk

Towson, Maryland Real Estate
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