Overage

In short, an overage means a surplus or an excess of money. An overage can present itself at a property at an auction where the asset has gone over the asking price. Suppose there’s a second lien or a mechanic lien on the house. In that case, the former owner can pay them off during the process and still receive the surplus.

What do a mortgage and a tax overage mean?

An overage occurs at the end of a foreclosure deal, either a tax foreclosure or a mortgage foreclosure sale. The property sells for more than the sum of all debts the former owner incurred. Later, the debt gets paid off out of the sale’s revenue. In addition, the property’s former owner can claim the balance of the money as their own legit income.

According to JP Morgan, there are approximately 3,000 tax sales daily, bringing in around $13 million as proceeds. This amount is put aside, waiting for the former owners to claim it. Paradoxically, that doesn’t happen that often. 

Example for overage

Let’s picture the following scenario. Property goes up for tax auction or real estate auction. The former proprietor owed taxes of $7,000. Then, a buyer, developer, or investor buys it for $30,000. As a result, a surplus of $23,000 emerges. In other words, the property has gone for $23,000 over. Suppose there are no additional general liens on the property, to which we add homeowners association fees, IRS debts, or child support liens. In that case, the overage will go to the former homeowner.

Depending on the state, the overage is paid out on an average of 120 days unless the auction is dated.

What does a positive overage covenant imply?

Commercial properties are considered an excellent and lucrative real estate niche. A commercial property overage determines a mechanism by which the land seller can obtain a share in its future development value. Let’s say a land developer purchases land from a seller wanting to build a house. However, in the end, the developer receives better terms, such as more advantageous planning consent, and ends up making five instead of just one property. Thus, the sold land will increase in value. 

Reasonably, the original seller intends to share in the added value. And this is when a so-called positive overage covenant comes into the big picture as a clause stipulated in the sales documentation. The covenants will safeguard the owner’s rights to extra profit.

Overage in granting loans

Loan officers sometimes charge a more considerable origination fee, discount points, or even a higher interest rate for a specific loan or mortgage. These fees exceed the lender’s market rate for those loans that the Federal Housing Administration FHA backs up. Overage means the difference between the two sums. However, an overage doesn’t imply a heftier origination cost for the lender. Note that a lending institution or broker who allows overages on FHA mortgages under $100k breaks the FHA’s pricing rule.

How do loan officers grant mortgages? Loans are given based on rates and points, subject to daily changes. Loan officers monitor these changes. Then comes a borrower who agrees to a loan with higher terms than the posted ones on that given day. From time to time, the borrower doesn’t know and isn’t informed about these changes. It depends on the officer’s good ethics. Those officers who keep the borrower uninformed obtain an overage.

Final thoughts

An overage occurs when you pay a surplus or an excess amount on your mortgage. Subsequently, the overage will likely end up in your loan officer’s pocket. You can protect your interests by revealing to your loan officer that rates aren’t fixed. Furthermore, you can ask them if they charge you an overage if interest rates have changed.