In an article by FREEandCLEAR

In an article by FREEandCLEAR, it explained Mortgage Lender Overlay as ‘ A mortgage lender overlay is qualification requirement applied by a lender that exceeds the standard qualification guidelines for a loan program. Borrowers should think of lender overlays as an extra layer of guidelines they must meet to qualify for a mortgage. In short, applying overlays means that lenders use tougher borrower qualification requirements than they are required to according to general mortgage industry guidelines.
In addition to using the qualification requirements established by the government agencies or GSEs, lenders develop their own internal mortgage qualification policies, also called lender underwriting, and this is where lender overlays come into play. In some cases lenders use qualification requirements for their internal underwriting process that are tougher than the guidelines established by the government agencies or GSEs. Because lender overlays are designed to manage risk, they affect higher-risk borrowers more than lower-risk borrowers.’