What is a bank overlay structure?
A bank overlay structure is a type of mortgage loan program that allows borrowers to obtain multiple loans from different lenders in order to purchase a property. This structure is often used by borrowers who are unable to obtain a traditional mortgage loan due to credit or income issues.
The concept of a bank overlay structure is simple: multiple loans are obtained from different lenders and then combined into one loan. This allows borrowers to secure financing for a property even if they do not meet the requirements for a traditional mortgage loan.
Primary Loans
In a bank overlay structure, the primary loan is typically a government-backed loan, such as a FHA or VA loan. These loans have more lenient credit and income requirements than traditional loans, making them more accessible to borrowers who may not qualify for a conventional mortgage.
Secondary Loans
The secondary loan, also known as a piggyback loan, is used to make up the difference between the primary loan and the purchase price of the property. This loan is typically a private loan, such as a home equity loan or a second mortgage.
Benefits of a Bank Overlay Structure
One of the main benefits of a bank overlay structure is that it allows borrowers to avoid paying private mortgage insurance (PMI). PMI is typically required when a borrower makes a down payment of less than 20% on a conventional mortgage loan. However, in a bank overlay structure, the secondary loan can be used to make up the difference and avoid the need for PMI.
Another benefit of a bank overlay structure is that it can help borrowers with credit or income issues obtain financing for a property. This can be especially helpful for borrowers who are self-employed or have a high debt-to-income ratio.
Drawbacks of a Bank Overlay Structure
However, there are also some drawbacks to a bank overlay structure. One of the main drawbacks is that it can be more expensive than a traditional mortgage loan. This is because borrowers will have to pay interest on both the primary and secondary loans.
Additionally, a bank overlay structure can be more complex than a traditional mortgage loan. This can make it more difficult for borrowers to understand and navigate the loan process.
Overall, a bank overlay structure is a type of mortgage loan program that allows borrowers to obtain multiple loans from different lenders in order to purchase a property. This structure can be beneficial for borrowers who are unable to obtain a traditional mortgage loan due to credit or income issues, but it can also be more expensive and complex than a traditional loan.
It is important for borrowers to carefully consider the benefits and drawbacks of a bank overlay structure before deciding whether to pursue this type of loan. It is also important to work with a lender who has experience with bank overlay structures and can help guide borrowers through the process.
Conclusion
In conclusion, Bank overlay structure is a creative and flexible loan structure that can help people who are not qualified for traditional loans to purchase a property. It is a combination of primary loan and secondary loan, where the primary loan is typically a government-backed loan and the secondary loan is typically a private loan. This structure can help borrowers avoid paying private mortgage insurance and can help borrowers with credit or income issues obtain financing for a property. But it also has its drawbacks like higher interest rate and complexity. Therefore, it is important for borrowers to carefully consider the benefits and drawbacks of a bank overlay structure and work with an experienced lender before deciding whether to pursue this type of loan.
