​Loan Guidelines vs Overlay’s - The differences between lenders

5 Replies

I received the following question via private message today and it reminded me that most consumers don't understand where lender's guidelines can be different and in what situation lenders must remain the same. Below is the question and my reply to the question. slightly altered for this post.

Hello Tim Do you know of any new conventional **** options with less than 20% down for a multifamily?

Thank you

I assume you mean for a non-owner occupied property. If you are talking about an owner occupied purchase, then yes I can do 5% down conventional on a 2-4 unit property.

If you are talking about a non-owner occupied property, then no lender has that product in a conventional loan. There is a misconception between consumers that because there is a difference between lenders then you just need to keep calling around to find someone who is less restrictive, but lenders have differences between them which are called "overlays". This means that any lender can make conventional, FHA, VA, or USDA guidelines more restrictive, but no lender regardless of size or other factors can make them less restrictive. This is why you will see some lenders who have higher minimum credit score requirements, but you will never see a lender go below 620 on a conventional loan because 620 is the lowest that conventional guidelines allow, but a lender can require a higher score. Another common overly for an investor would be appraisal seasoning for cash out. Delayed financing transactions excluded conventional loan guidelines will allow a lender to do a cash out using a higher appraised value after 6 months but many lenders require 1 year. This would lead many to believe that the lender allowing six months is doing something special, when in fact they are just not "overlaying" the conventional guideline.

Fannie Mae & Freddie Mac will not allow any lender to do a multifamily loan for less than 25% down payment if it's non-owner occupied. You can see here for your self:


What further complicates the situation for consumers is that some lenders will do things that are less restrictive than conventional guidelines will allow. That is possible but then by definition, the loan is not a conventional loan and generally will not have all the benefits that conventional loans offer. These loans are generally called portfolio loans and often this means the rate of the loan is not fixed for the length of the loan, or the amortization is less than 30, years. It is typical for these loans to have a balloon element to them and if they are rate competitive, or without a balloon, they are often 1% or higher than a conventional rate. And, many times these loans have a pre-payment penalty which is allowed in Minnesota on business purpose loans.

The remainder of the answer does not meet the forum guidelines for self-promotion and so I have removed that portion of the answer.

If you are uncertain if a guideline is an overlay or an "Agency" Guideline please post your question or scenario below and I will let you know.  

@Tony Otis good question. I use them pretty interchangably because all commerical loans that I have originated are portolio loans and the lenders will do a commercial portoflolio loan on a non-commerical property, but not all portfolio loans are commercial in nature. A great example would be subprime loans of the past. They were portfolio loans but definately not commerical. In the current market the alternative portfolio loans are called non-QM loans because they do not meet the "Qualified Mortgage" standard as outlined in the Dodd/Frank legislation. I would say the a loan is a commerical loan if it has a soley business purpose, meaning there is no intention for the owner to reside in the property as their primary residence, and the residence will be used only for business.