What is a mortgage overlay?

Answer 1

What Are "Lender Overlays"?

• By: Ken Cook
• FHA Professional
• http://wiki.answers.com/blog/mortgage/author/kencook)

Virtually everyone has seen the commercial where a big dot com mortgage lender portrays how they have less paperwork than any of their competition. Likewise most people have some idea of the basic mortgage qualifications for Fannie and Freddie loans and FHA insurance.

Skip forward.

There are literally dozens of major banks who offer the same home loans insured, guaranteed or purchased by the same organizations. Some, a very small few, of the largest banks hold the mortgage loans in their own portfolio. Even those who portfolio the loans use the guidelines for lending set forth by the quasi- governmental agencies and those who would be insuring or guaranteeing the loan.

In a perfect world that would be the end of the story. In a perfect world you would phone a lender and either be qualified or not, be required to complete exactly the same paperwork and provide the exact same historical documentation. In a perfect world.

Welcome to earth, enjoy your visit!

"I have never been asked for this before and I've purchased or refinance several homes", the voice said into the phone, "why do you guys need to see this?"

It is, after all, all about risk. Better yet it is about mitigating the risk of a home mortgage. When risk is mitigated the mortgage lender feels comfortable issuing the loan. Sometimes agency guidelines (FHA, VA, Fannie Mae, Freddie Mac, etc.) are not stringent enough to make the lender feel comfortable. That is, at least, in today's real estate and mortgage market environment.

You can spend a week reading all of the HUD guidelines for an FHA insured home loan and deem yourself qualified for a home mortgage based on the guides presented by FHA for insurability. This would be fine only if the lender was being completely removed from any liability. The truth is the lender still assumes all of the liability of the home loan and to collect on a defaulted loan always makes the lender look bad. Or at least look worse.

Feeling, nothing more than feelings.

In an effort to help the lender "feel better" about lending on mortgages they create their own guidelines which extend the guides of the agencies which publish them. These augmentations cannot violate any portions of the Fair Lending Act but they can change income, asset, credit score, and historical requirements.

Lender overlays can include, but are certainly not limited to, items like debt ratio, amount of assets and the type of assets, minimum down payment, property seasoning, and other attributes. Most common is the credit score overlay.

FHA, for example, has not had any minimum credit score requirements until the recent proposal to change loan to value ratios yet most banks require a minimum credit score of 620 or higher to approve the loan. Some, especially some larger regional banks in the southeast, require a minimum score of 660 to qualify for an FHA loan.

In spite of some failed actions to make it difficult to shop for a loan, such as the new amended Good Faith Estimate, you can still shop on qualifications. Even if the lender you are speaking with cannot tell you if you are qualified over the phone they should be able to help you with their qualification guidelines.