What is a Bank Overlay on a Mortgage and why should I care?

Ever hear the term "bank overlay" and wonder what it means?

Loan products all have their own guidelines.  Government loan guidelines are put into place by the agencies guaranteeing or insuring the loan. Conventional guidelines are from Fannie Mae or Freddie Mac.

These are the basic or minimum requirements.  In addition to these there can be additional requirements set forth by mortgage insurance companies or the banks who will be purchasing the loan.  An analogy would be as if the minimum guideline requirements are the national guidelines and the "overlays" are the local guidelines.

For example, to receive a conventional loan for anything above 80% loan to value you will be required to have mortgage insurance.  The lender may have a minimum FICO score requirement of 620 but to receive the mortgage insurance you may need a FICO score of 700.   So the loan must be underwritten to the most stringent of the two which would be the mortgage insurance company.

In another example, say the VA regulations have no minimum credit score requirement but the lender is requiring a minimum FICO score of 640, this is a bank overlay. Bank overlays exist on many things such as reserve requirements, credit profile, condition of the property, etc.

When a situation arises and there is a problem with meeting a guideline always ask if this is a bank overlay.  If so, the loan could be moved to another bank that doesn't have that particular overlay.

Always work with a knowledgeable loan officer that is aware of the bank overlays for the investors they sell their loans to. These overlays can change overnight and one must keep abreast of these changes.