What is an underwriting overlay?

Fannie Mae, Freddie Mac, USDA, FHA, and VA have underwriting guidelines that all lenders must follow if the loan is going to be sold to, insured by, or guaranteed by them.

Lenders are allowed to add their own, more restrictive underwriting guidelines on top of these guidelines. These additional guidelines are called underwriting overlays.

Why do overlays matter?

The loan must be underwritten according to the most restrictive guidelines:

  • If the loan is going to Fannie Mae and Fannie Mae has restrictive guidelines that must be met.
  • However, if the individual lender has more restrictive guidelines than Fannie Mae, then the lender’s guidelines are the real guidelines.

Some Examples of Overlays

  • Fannie Mae has a minimum credit score of 620, but the lender has a minimum score of 640. 640 is then the minimum score allowed!
  • Fannie Mae allows a maximum debt-to-income (DTI) ratio of up to 50%, but if your lender has a maximum DTI of 45%. 45% is the maximum DTI allowed!

What about mortgage insurance?

Private mortgage insurance companies have their own underwriting overlays.

  • If the mortgage insurance overlays are more restrictive, then they are the real guidelines.
  • Mortgage insurance guidelines are almost ALWAYS more restrictive than the lender’s or Fannie Mae’s.
  • FHA and USDA loans do not have mortgage insurance overlays.

First Nations has relationships with lenders who do not impose underwriting overlays. Call today to find the loan best suited for your needs.