The basic process of “doing” a loan is relatively simple: the borrower provides the lender documents proving that they are credit worthy, the lender reviews the documentation and the status of the property (underwriting) to verify that it is a sound risk, and then the money is lent. That being said, the process can take months, with the bulk of it being spent in underwriting the loan.


Underwriting criteria change with time, but one of the standard questions from borrowers is, “If Fannie Mae, Freddie Mac, FHA, or VA allow a certain loan-to-value (LTV), why doesn’t a lender?” Another way of asking this is, “What is a lender overlay?” It is important to understand that underwriting guidelines can vary widely from lender to lender even if the government specifies the criteria.


Basically, lenders have different appetites for risk, along with different specialties, so what one lender will gladly approve another will not. A “lender overlay” is essentially an expanded guideline (or set of guidelines) on top of what Fannie Mae, Freddie Mac, or the FHA/VA will allow. It is important for borrowers to remember that Fannie Mae, Freddie Mac, and the FHA/VA all set underwriting guidelines for residential mortgages but they don’t actually lend money directly to consumers. Individual banks and lenders provide home loans directly to consumers, and often they impose their own rules on top of those “agency guidelines,” and those additional rules or requirements are known as overlays.


Many of the overlays come from a lender’s experience with a type of loan. As an extreme example, if a lender finds out that every loan on white houses above 80% LTV goes into default, the lender will put an overlay on that requires every loan on a white house to be below 80% LTV, even if Fannie Mae and the other agencies will buy loans on houses that are white up to 95%.


Another example is that the FHA (Federal Housing Administration) will accept credit scores as low as 500 as long as you’re able to put 10% down. While this is true as far as the FHA goes, the particular lender you may be speaking with could require a minimum FICO score of 640, 680, or even higher. This is their comfort zone. Perhaps they’ve looked at default data and found that borrowers with scores below 640 happen to miss mortgage payments frequently.


These are just a few examples of lender overlays – there are literally hundreds of overlays required by individual banks and lenders throughout the country. They range from credit score (most common), to max loan-to-value, to max debt-to-income ratio, time after a short sale to borrow money to buy another house, and much more.

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