Rules, on top of Rules, on top of Rules.
MARCEL DEITRICH NMLS#231135 AT GUARANTEED RATE
Lender Overlays: What Are They and Why Are They Important?
There are many factors to consider when choosing a lender for your home mortgage. One of the most important, yet often overlooked, concepts to familiarize yourself with is the “lender overlay,” which is an additional requirement (or set of requirements) on top of what Fannie Mae, Freddie Mac, Ginnie Mae/FHA and VA will allow before giving you a loan.
Fannie Mae and Freddie Mac create the guidelines for who gets approve for a mortgage. These are the baseline requirements that homebuyers must meet in order to purchase a mortgage on the secondary market (i.e., through a bank or credit union). These requirements include things like your credit score and employment history, which help lenders ensure that you are a reliable borrower.
This is where overlays come into play and can make things tricky for some homebuyers. Overlays are additional guidelines that large and small lenders alike add to Fannie and Freddie’s existing guidelines in order to close loans with them. They do so to mitigate risk. Ultimately, individual banks and lenders are the ones issuing the loans, so they want to minimize the chances that anything will compromise repayment of the loan by imposing their own rules on top of Fannie and Freddie’s guidelines.
Overlays can include anything from credit score (most common), to max loan-t0-value, to max debt-to-income ratio, and much more. The more overlays that a lender has, the more difficult it is to get approved for a mortgage.
When working with a broker, it is a good idea to find out if they sell their loans directly to Fannie/Freddie or if they sell the loans to some of the larger banks out there. Guaranteed Rate sells their loans directly to Fannie/Freddie/Ginnie, so we don't have overlays. If they sell loans to larger banks, it can be harder to get approved. If you apply for a loan with a bank directly, you will most likely have to deal with their overlays.
As a Buyer or Realtor, having a lender that has the ability to underwrite a loan to a specific investor will often allow the highly competitive rates and costs. But, you also want the same lender to be able to sell directly to Fannie Mae, Freddie Mac, and Ginnie Mae. It means that if your loan does not “Fit in the Box” for other investors, that your loan can be underwritten WITHOUT any overlays.
If you’re in the market for a new home, I would love to speak with you about your options for home ownership. Email me at mdeitrich@rate.com or by phone at (972) 6782-3246.
Marcel Deitrich VP/Branch Manager Guaranteed Rate NMLS#231135 Rate.com/marceldeitrich