What are lender overlays?

A crucial part of your home buying experience as a buyer or your ability to close more deals as a realtor is your lender. The ability to place and close loans is determined by some factors such as experience, creativity, persistence and the ability to package or present the loan to the investor (lender). Assuming your loan officer has all of these traits, an understanding of guidelines is imperative.

Various agencies issue underwriting guidelines. These include Fannie Mae and Freddie Mac, the VA and HUD. From there, individual investors (lenders) add their own overlays. Here are some examples:

1. Down Payment Requirements: Fannie Mae might purchase loans from investors on 2nd homes with 10% down. There are lots of individual lenders still requiring 20% down on such purchases.

2. Reserves: Often on FHA loans, the buyers has received their down payment as a gift from a relative. Under FHA rules, the borrower is not required to have additional funds. Some lender overlays now require a few months worth of savings in a checking/savings account.

3. Tax Returns: While Fannie Mae may only require 1 tax return for self employed borrowers, almost all lenders require the last two returns. Having a source that only requires one can be a big plus for a borrower who had a tough time in 2008 but turned it around in 2009.

4. Ratios: As a rule, Fannie Mae will allow a total debt load of 45%. Some lenders have a number around 2-4% lower in order to be a little bit more conservative.

5. Appraisal: This is a big one. Fannie Mae guidelines recognize that there aren't always good comparables within 1 mile of the subject property and sold within the last 90 days. There is some lenience built in for a lack of good, ewcent comparables. Some lenders, to remain nameless, will either not accept the appraisal or adjust (lower) the value to suit themseleves, thus destroying an otherwise good tranaction.

These are just a few examples of overlays and they can be dealbreakers. In my opinion, the best way around this is to work with a lender that has more than one source of funds. A correspondent lender with 8-12 national sources should fit the bill. That way, if your scenario doesn't fit in at Bank of America or Wells Fargo, we can look at Citimortgage, Chase, GMAC or Franklin American.

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Patrick Randles

Sunstreet Mortgage, LLC

Tucson, AZ 85718

(520)850-7485