Mortgage 101 – Mortgage Overlays

What are mortgage overlays?

Fannie Mae, Freddie Mac, FHA, and VA each have underwriting guidelines that all lenders must follow if the loan is going to be sold to, insured by, or guaranteed by them. Each lender is allowed to add their own, more restrictive underwriting guidelines on top of these guidelines. These additional guidelines are called underwriting overlays.

Why do mortgage overlays matter?

Overlays matter because all mortgage loans must be underwritten according to the most restrictive guidelines. For example:

  • If the loan is going to Fannie Mae and Fannie Mae has the most restrictive guidelines, the Fannie Mae guidelines are the real guidelines.
  • If the individual lender has more restrictive guidelines than Fannie Mae, then the lender’s guidelines are the real guidelines.

Mortgage overlay examples

Here are examples of two common overlays:

  • Fannie Mae has a minimum mid-FICO score requirement of 620, but the lender has a minimum score of 640. 640 would be the minimum score allowed if the loan were to be underwritten by this particular lender.
  • Fannie Mae allows a maximum debt-to-income (DTI) ratio of 50%, but the lender has a maximum DTI of 45%. 45% would be the maximum DTI allowed if the loan were underwritten by this particular lender.

Marquee Mortgage Advantage

Marquee Mortgage works with some lenders who have no overlays! This is another advantage to working with a mortgage broker with access to multiple lenders versus working with a mortgage banker with access to only their own guidelines and overlays. This flexibility allows a mortgage broker, with their knowledge of multiple lenders guidelines, to place a mortgage loan with the lender whose guidelines best meet the needs of a particular borrower.