Bank overlays (aka an additional layer of guidelines) are the main reason why you can ask 10 loan officers the same question and get 10 different answers. Every single bank and investor has their own overlays over the standard Fannie/Freddie/HUD guidelines.
So why the additional layers?
Investor appetite for risk. Some are ultra conservative and have so many additional guidelines only the “perfect borrower” will qualify for a loan through them. Generally I’ve found these investors while being the most restrictive have the best pricing.
Other investors want a certain type of transaction and will favor those with fewer overlays which in turn drives that type of business to them.
An example with FHA loans in the past, when FHA didn’t have a minimum FICO requirement, some investors had a 580 FICO overlay while others had a 620.
In other cases you’ll see the same property and borrower be denied a loan at one bank and approved with another.
These overlays can be frustrating for borrower, real estate agent, and loan officer alike but can’t be avoided.
So next time you ask a loan officer why another bank can provide financing and they can’t, you can bet it’s because of overlays.
Michael Regan (NMLS #275695) specializes in Marin, Sonoma, and Napa counties. You can reach him at 415-672-2499 or online at www.TheReganTeam.com
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So if my buyer can't get a loan from one bank I should suggest trying another? That could be very frustrating!
In short, yes.
An example I've seen recently is a west coast bank limited the debt to income ratio to 45%. Depending on the borrower situation I may be able to go to 56%. So in that case a borrower was denied a loan due to high DTI while I was able to close it.