The Truth About Lending: Part 1

[Zack Karp]

Hi BP family!  I have been reading and absorbing lots of fantastic info from this great community, and I have learned a lot from you all.  Time for me to give back.

A quick story about me, I love real estate.  I just love it.  Everything about it.  From walking through a property, to buying it, to owning it, to financing it, to selling it....every property is different, every person is different, and so it will never be the same thing twice and it never gets old.

My primary business is that I have been a residential loan originator for the past 17 years. I have been a broker, correspondent, and worked directly for a major bank. I have owned my own company, and I have been just a loan officer. So I have been on all sides of Conventional, FHA, VA, and Subprime lending (back in the day).

I have been reading many posts and replies here on BP, and it seems that many people really do not understand what can and cannot be done with lending (which is expected), and while most people are giving great info, some are not.  So I wanted to write an unbiased thread about the truth, and if there is enough interest, I will continue to provide as much info and new topics as I can.

Part 1 of this series is going to be called "Overlays". What is an overlay you ask? An overlay is a lender imposing their own guidelines on top of the actual guidelines from Fannie/Freddie/FHA, etc. Many banks & lenders do this to protect their risk in lending to borrowers. Why? Well there are many reasons, but mostly financial (isn't everything driven by money?). These overlays allow for the lender to write only the highest quality loans, which in turn can help their profits, stock, default percentage, etc.

Overlays come in many shapes and sizes.  It can be the FICO credit score requirements, Loan-to-Value, asset requirements, and/or many other non-numerical lending guidelines.  The list is long for all of the possible overlay opportunities, as the underwriting guidelines are hundreds of pages.

Here's an example.  Fannie Mae (conventional 1-4 unit lending) allows up to 10 financed properties.  But you call your bank, and the loan officer tells you that you can only have 4 financed properties, and then tells you that you need to get a private/hard money loan.  In reality, that bank has an overlay, and you are getting bad advice without even knowing it.  And the worst part it is, that an uneducated loan officer for that bank may not even know that Fannie allows 10 properties, and they don't even know that they have an overlay or what an overlay is!  That lender has decided that they do not want the exposure of borrowers who have more than 4 mortgages in their lending portfolio.  But there are lenders out there that do not have any overlays to the Fannie guidelines, or just a few of them, and will lend on 10 financed properties.

Many of these overlays started after the mortgage meltdown, as lenders wanted to take less risks, and try to improve their default percentages.  Overlays have been around longer than that, but that's when it kicked into overdrive.  Subprime and most Alt-A went away, and suddenly it appeared no one was lending because of all the overlays.  As we distanced ourselves from that time, the foreclosures cycled through, borrowers decreased default, and lenders removed and/or reduced many of their overlays.  But not all of them.  In fact, not even most of them.  Most banks and lenders still have them, and the overlays vary per lender.  Most brokers still have them, because they are actually underwriting to those same bank's/lender's guidelines.

As a borrower, you need to find a good, qualified, educated loan professional to align yourself with that has a strong product line with little or no overlays, especially as an investor.  Many people think they need hard money or private money, and don't know they can qualify for a conventional product.  Do your homework.  Ask questions.  Get referrals.  Use BP and network, this is a fantastic place to find quality lenders.

Hopefully you find this topic useful and informative.  Best of luck and happy investing!