What is a Lender Overlay, What Does This Mean?

 

 

In the California home loan world you may come across the term “overlay”.  An overlay ia an additional rule that a lender applies to an already existing list of guidelines associated with a specific loan program.

For example, Fannie Mae guidelines say it’s o.k. that applicants can payoff credit card debt to help them qualify for a home loan while at the same time being in the process of obtaining a California home loan.  However, individual lenders may add an overlay that says no it’s not o.k. to do this.

Overlays vary from lender to lender which can cause confusion.  One lender may have an overlay on a specific issue and the next lender may not have an overlay on that same issue, it’s lender preference.

If a lender does Fannie Mae loans, they already have to follow a set of strict guidelines.  If the lender does not follow each Fannie Mae guideline, the loan can not be deemed a Fannie Mae loan, which hurts the borrower and the lender.  Again the lender can put even stricter overlays on top of the Fannie Mae guidelines to make the loan more difficult to obtain.  Lenders are conservative in todays market.  Some lenders do portfolio loans which means they don’t have to follow Fannie Mae guidelines, they can make their own guidelines.  But a lender limits its liquidity if they do this, which in this market is not wise, but yet some lenders do portfolio loans.

Overlays like it or not are here to stay.  The key is to have an open line of communication with your Loan Originator so that you don’t run into any unnecessary overlays that can hurt your chances on qualifying for a California home loan refinance or purchase loan.

If you have a question on this article or anything regarding the loan process on obtaining a California mortgage, please click here and let me know your scenario!

Best,

KW

 

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