If you want to use the Overlay module in core this post explains how to implement it quite well. Another useful reference is the User Modal module which contains examples.
The limitations include the requirement to assign the 'Access the administrative overlay' and 'View the administration theme' permissions to your users and the need to declare your paths in hook_admin_paths() as administration paths.
So while Overlay might seem like a good idea it is in fact aimed at administrating Drupal rather than being a modal framework for general use. Unfortunately the other candidate modules for this functionality aren't there yet with a D7 release so it may be the only alternative to ctools' modals or the various lightbox modules at this point. I guess it depends on what you want to put in there and how much dev work you are interested in doing.