Overlays are extra guidelines or conditions that a lender requires for approving a loan above and beyond what is required by that program. At Skyridge Lending, we have very few overlays on some of our programs and no overlays on the rest.
VA guidelines are set by the VA.
FHA are set by the Department of HUD.
Conventional Conforming are set by Fannie Mae or Freddie Mac.
Conventional Non-Conforming guidelines are set by the servicing lender or investor.
A good example of an overlay that most banks and lenders currently have in place is a minimum credit score requirement that is higher than the program requirement. For example, VA allows a credit score of 560 at 90% loan-to-value and a 580 or higher for 100% financing. That is what we at Skyridge Lending follow.
However, many lenders and banks have an overlay for this program, requiring a 600, 620, or even 640 credit score before they will do the loan. We see the same thing with FHA. Many times, other lenders are requiring a 640 score, while FHA will go down to 560 in some cases, or even lower in certain situations where the loan meets the guidelines. Conventional conforming will go down to a 620 credit score currently. However, a common overlay is a 660 credit score, which we see many banks and lenders impose. Again, we follow the federal guidelines on this and can lend on conventional loans down to scores as low as 620.
The credit score is just one factor in the loan process and does have a bearing on the interest rate. However, you also need to consider if what is on the credit meets the guidelines for loan approval. It is best to contact one of our loan officers by email or phone about your specific situation for more information on this.