Conventional Mortgage

The Most Common Conventional Mortgage Loan Programs

Here is a list of the seven most common conventional mortgage loan programs.

Conforming

A conforming mortgage conforms to the loan amounts and underwriting guidelines of Fannie Mae and Freddie Mac. The conforming loan limits are updated yearly.

Conforming mortgage loans require 3% down (or a 97% loan-to-value ratio if it’s a refinance), more if you have a lower credit score. Debt-to-income (DTI) ratio requirements are usually 45% or lower; however, there are times when a loan applicant can go as high as a 50% DTI. All conforming mortgages must go through an Automated Underwriting System (AUS) that evaluates dozens of risk factors.

Desktop Underwriter is the AUS for Fannie Mae and Freddie Mac uses Loan Product Advisor.

The three main risk factors are credit history, the amount you’re borrowing compared to the home’s value, and your ability to repay the loan.

Portfolio

Portfolio mortgage loans are conventional loans typically underwritten to the standards of an individual lending institution. Under most circumstances, the lender plans to retain the loan’s servicing rights. Servicing rights mean that a lender facilitates the administrative requirements of the loans (i.e., sends out the monthly statements and required correspondence).

Jumbo

Another well-known conventional mortgage is the jumbo mortgage. This name refers to the loan amount, which is always higher than the conforming home loan limit. Jumbo loans can be portfolio loans, and these loans can generally be more challenging to qualify for. Usually, you will need at least 20% down (or 10% down with a second mortgage) and a credit score above 700.

Income sources are scrutinized more than conforming mortgages, and you’ll need a lower debt-to-income ratio to qualify.

Non-Qualified Mortgage Loans

Non-qualified mortgage (Non-QM) loans are unique conventional mortgage loans for those with unique income streams. These types of mortgages used to be referred to as “sub-prime” loans before the housing boom that started in the early 2000s. These loans do not meet the traditional income requirements set forth by the Consumer Financial Protection Bureau (CFPB). Non-QM conventional mortgages are suitable for those with seasonal employment.

For example, a loan applicant may be a ski instructor during the winter and a lifeguard during the summer. Both employments are contractual, meaning there is no guarantee they’ll have a job when the season changes.

Since these conventional loans have more risk than loans that require more income certainty, they come with higher rates, higher down payment requirements, higher credit scores, and lower Debt-To-Income(DTI) ratios.

Bank Statement Mortgage Loans

One type of non-qualified mortgage is a bank statement loan. This type of mortgage requires a loan applicant to turn in twelve or twenty-four months of bank statements. Depending on the loan applicant, these statements can be business or personal bank statements (sometimes both are required).

Income and expenses reported in the statements are used to determine income, and that amount is used during the underwriting process.

Debt Service Coverage Ratio

Debt Service Coverage Ratio (DSCR) mortgages are designed for real estate investors interested in purchasing or refinancing a non-owner-occupied property (rental). A DSCR loan is a mortgage based on a property’s cash flow, using only two metrics: mortgage debt and income. Maintenance, repairs, management fees, and other property-related expenses are not included.

The attractive part of a DSCR mortgage loan is that the applicant does not need to provide income documentation to qualify. The underwriter’s approval is based on the property’s cash flow. Credit score and loan-to-value ratio requirements are included in the underwriting process.

Individual Tax Identification Number

Individual Tax Identification Number (ITIN) loans are designed for people without a Social Security number but with a tax ID number. Essentially, these are work visa home mortgages for loan applicants who are in the United States on a work visa.⁴

Loan applicants must have a valid work visa, a two-year work history, and a qualifying debt-to-income ratio. Credit history is not required; however, it is preferred. Having a 620 or higher credit score with a two to three-year credit history makes getting approval much more likely.

Rates and fees for an ITIN loan are higher than those for a traditional conventional loan, and applicants are typically required to make a larger down payment.

Asset Depletion

An asset depletion mortgage loan is a home mortgage based on an applicant’s liquid assets rather than their taxable income. It’s excellent for loan applicants who may not have a job, have just transitioned to, or are in retirement.

The underwriter will take the loan applicant’s liquid assets and divide them by 240 or 360 months, and that number will be used to qualify the loan applicant for the asset depletion loan. Liquid assets include;

• Cash-out hand
• Stocks and bonds
• Certificate of deposits

Your physical assets, such as a paid-off car or jewelry, are not included. Only assets that can be sold quickly and have a reasonably self-evident cash value are included. Rates and fees are higher for asset depletion loans, as are the down payment requirements. Check with your loan officer about the underwriting requirements before you apply.