Investor Overlay is an additional underwriting requirement or guideline imposed by an investor purchasing mortgage loans in the secondary market, which may be more stringent than the standard underwriting guidelines.
An Investor Overlay refers to an additional requirement or guideline imposed by an investor when purchasing mortgage loans in the secondary market. These overlays are typically more stringent than the standard underwriting guidelines established by government agencies such as Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA).
Investors in the secondary market are financial institutions, such as banks or mortgage-backed securities (MBS) investors, who purchase mortgage loans from primary lenders. They do so to either hold the loans as an investment or package them into mortgage-backed securities for sale to investors.
While the primary lenders must adhere to the standard underwriting guidelines established by government agencies, investors have the discretion to impose their own additional requirements, known as investor overlays. These overlays act as an extra layer of risk management and allow investors to mitigate their exposure to potential losses.
Investor overlays may include more stringent requirements related to credit scores, debt-to-income ratios, loan-to-value ratios, employment history, documentation standards, property types, or any other aspect of the loan underwriting process. These additional requirements aim to reduce the risk of default and ensure that the loans purchased by investors meet their specific criteria.
Investor overlays can vary among different investors and may change over time depending on market conditions, risk appetite, or regulatory requirements. Mortgage lenders and brokers need to be aware of these overlays when originating loans, as loans that do not meet the investor’s overlay requirements may not be eligible for sale in the secondary market.