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I use paint shop pro, but maybe this will help:
I would use different layers so that when you're done, you can move words around - just in case.
Save it as a psf, that's fine, but you'll need to merge your layers once you're happy with the finished product and perhaps save it as a different psf file so that you have the original to make any future changes. Or, you could save as a png which will keep the background transparent, you still need to merge the layers though.
As for black outlines, I'm not sure what you mean...if you're referring to the edges of the overlay, use a brush, play with the different style brushes, as well as the opacity & size.
HTH!
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Traci
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