BOULDER – There are many factors to consider when choosing a lender for your home mortgage. One of the most important, yet often overlooked, concepts to familiarize yourself with is the “lender overlay,” which is an additional requirement (or set of requirements) on top of what Fannie Mae, Freddie Mac, or the FHA/VA will allow before giving you a loan.
Fannie Mae and Freddie Mac create the guidelines for who gets approved for a mortgage. These are the baseline requirements that homebuyers must meet in order to purchase a mortgage on the secondary market (i.e., through a bank or credit union). These requirements include things like your credit score and employment history, which help lenders ensure that you are a reliable borrower.
This is where overlays come into play and can make things tricky for some homebuyers. Overlays are additional guidelines that large and small lenders alike add to Fannie and Freddie’s existing guidelines in order to close loans with them. They do so to mitigate risk. Ultimately, individual banks and lenders are the ones issuing the loans, so they want to minimize the chances that anything will compromise repayment of the loan by imposing their own rules on top of Fannie and Freddie’s guidelines.
Overlays can include anything from credit score (most common), to max loan-to-value, to max debt-to-income ratio, and much more. The more overlays that a lender has, the more difficult it is to get approved for a mortgage.
When working with a broker, it is a good idea to find out if they sell their loans directly to Fannie/Freddie or if they sell the loans to some of the larger banks out there. If they sell loans to larger banks, it can be harder to get approved. If you apply for a loan with a bank directly, you will most likely have to deal with their overlays.
This can be problematic for potential homebuyers, especially those who are employed in the marijuana industry. As I wrote back in April, the marijuana industry has a nebulous relationship with financial institutions due to the fact that marijuana remains illegal under federal law, which governs banks and lenders.
Depending on your level of involvement in the marijuana industry, you could have a more difficult time obtaining a home mortgage. Independent contractors who have a relationship with the marijuana industry are not permitted to count marijuana-related income toward mortgage qualification. Along those same lines, if you own 25% or more of any business in the marijuana industry, you are also considered to be self-employed, and that income cannot be used to qualify for a mortgage, either. However, Fannie Mae recognizes income earned by W-2 employees who own less than 25 percent of the business to qualify for a mortgage.
This becomes an issue when a borrower turns to a bank or credit union for a loan, and is turned down because the lender has overlays that prohibit a borrower who works in the marijuana business from counting this income. This is why it is especially important for borrowers who work in the marijuana industry in Colorado, Washington, or any future states that legalize marijuana to ask their broker if they sell their loans directly to Fannie/Freddie.
Michaela Phillips is the Vice President of Mortgage Lending at Guaranteed Rate, Inc., the 8th largest retail mortgage company in the country. Since entering the mortgage industry in 1994, she’s consistently been a top producer. Being a VP at Guaranteed Rate offers many advantages to her and her clients including unparalleled customer service, efficiency, and most importantly competitive rates. Contact Michaela at 303.579.5517 or via e-mail at [email protected]. NMLS: 312874.