Written by Dan Green
Dan Green
Dan Green (NMLS 227607) is a licensed mortgage professional who has helped millions of people achieve their American Dream of homeownership. Dan has developed dozens of tools, written thousands of mortgage articles, and recorded hundreds of educational videos. Read more about Dan Green.
This website discusses mortgage programs and how to qualify. Your eligibility may vary based on lender guidelines and investor overlays. Check with your lender for specific details.
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This article was checked for accuracy as of November 4, 2024. Learn more about our commitments to accuracy and your mortgage education in our editorial guidelines.
Updated: November 4, 2024
Lender overlays are additional qualification standards that lenders impose on home buyers. These standards are in addition to the minimums established by the official mortgage guidelines.
Lender overlays are a lender’s additional underwriting requirements that are not part of a mortgage program’s official mortgage guidelines.
Lender overlays, sometimes referred to as investor overlays, are applied at the discretion of a mortgage lender. They can vary between loan types. Some lenders use them extensively, while others may not use them at all.
Lender overlays are designed to reduce a lender’s risk and may include stricter approval standards. These can relate to credit score, debt-to-income ratios, and documentation requirements. Home buyers must meet a lender’s overlays to get their mortgage approved.
Examples of common mortgage overlays a home buyer might encounter include:
Because lender overlays vary between lenders, it is common for first-time home buyers to have their mortgage application declined by one lender, then approved by another without any changes to their application.
Imagine a first-time home buyer with a 610 credit score applying for an FHA-backed mortgage at their local credit union. They submit their application, supporting paperwork, and sign the required documentation. However, the credit union denies the mortgage application because of the buyer’s credit score.
The home buyer knows that FHA mortgages allow credit scores of 500 or higher. The buyer calls the credit union, which explains that they apply a lender overlay on credit scores, only approving FHA loans for buyers with FICOs of 640 or higher.
Not discouraged, the home buyer finds a different mortgage lender that follows the FHA’s official guidelines and gets their mortgage approved.
Lenders use overlays to reduce their risk. By setting higher standards than the federal minimum guidelines, lenders add an extra layer of security against default.
Yes, there is significant variation. Some lenders may closely follow federal guidelines, while others set much stricter standards.
For first-time home buyers, lender overlays can create additional challenges. Buyers may need to shop around to find a lender whose overlays are more suited to their financial situation.
Lender overlays are generally non-negotiable, as they are part of the lender’s risk management policies. It is more about finding the right lender for your financial profile.
The best preparation is to strengthen your financial profile with good credit, stable income, and a manageable debt-to-income ratio. Additionally, research various lenders to understand their specific overlays.
This article, "What are Lender Overlays?," authored by Dan Green, is based on extensive professional mortgage experience and includes references to trusted sources such as industry-leading financial institutions and expert research from the following websites:
This article was last updated on November 4, 2024.
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Lender overlays are additional qualification standards that lenders impose on home buyers, over and above the minimums established by the official mortgage guidelines.
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