As far as most people have considered, non conforming loans are the stepchild of conforming loans, the low budget option that melds well with many government sponsored entities and home insurance packages. Borrowers should know the basics of how to qualify for a conforming loan in order to increase their options when searching for a good mortgage lender. Here are the basics of what might have gone wrong during the conforming loan process, and why a lender might kick a borrower out to a non conforming loan.
1. Is my credit bad?
This is the major reason that borrowers do not qualify for conforming loans: Bankers love to lend money to stable salarymen whose credit showcases no risk taking whatsoever. Pay back all of your debts on time, and limit your debts in total, and you will usually have a higher credit score. If yours is below 660, then you will likely not qualify for a conforming loan. However, you can have an even higher credit score and still not qualify if you are bad about paying back debts on large assets on time. Because these assets are the most comparable debt to the house that you are about to take on, lenders view these line items as more important than say, a retail credit card that you missed a payment on.
Before you go into any bank to try to qualify for a conforming loan, make sure that you check your credit. Fix any mistakes, as the credit rating agencies may certainly make them on your report. Even if you do not think that you have a leg to stand on, you should still challenge any items that are dragging down your credit. Make your creditors prove that you are in the wrong. Many of them are too busy to respond to queries like this, and you may actually get some of those items dropped.
2. Is my debt to income ratio out of line?
Outside of good credit, you will need to have a good debt to income ratio in order to qualify for a conforming loan. Because lenders are looking for the most stable borrowers possible, they will not qualify you if they believe that you have a financial debt structure that will crumble the second that you have something unexpected occur in your life.
The magic number is 30 percent when you are dealing with the debt to income ratio, meaning that you should not spend any more than 30 percent of your income in your credit. Your lender expects that your mortgage will take up around 28 percent of your monthly costs. Any number higher than 30 with your debt to income means that you have more than half of your income coming out of your paycheck every month, a value that might upset your entire financial world if you have a car accident or you get fired from your job.
3. Do I have a down payment ready?
Although this is not a hard and fast rule, borrowers who have at least 20 percent of the total home price available up front as a down payment will probably do better when it comes to qualifying for a conforming loan. Lenders like to see that you have saved a bit of money; it shows foresight in your financial planning. It also gives you some skin in the game as well. If you do not have any equity in the property, then the bank takes on the full brunt of the loss in the event that you default. Because you are probably asking for an unsecured loan, the bank will have no recourse to recover its value. The lender wants to make sure that you hurt too, so much that you would not even think of defaulting and losing the value that you have put into the home.
The one exception to the 20 percent down payment rule occurs if you are insured as a borrower under the Federal Housing Administration (FHA) the United States Department of Veterans Affairs (VA), or some other government organization that drastically reduces your risk profile. In this case, the lender is assured of the investment in the home by the government, so the cash that you have on hand is not nearly as important.
4. Do I have a spotty income record?
The final reason that you may not automatically qualify for a conforming loan is the consistency of your income. If you are not able to show pay stubs from a job from at least a year back along with tax forms that show a consistent income for two years, then the lender may be forced to drop your application. If you have lost a job, then you need to show exactly why and when you lost it, how you are making up for that income, and how you save money in hard times to maintain a consistent income stream. If you are self employed, then you may have a problem here if you do not have an LLC that pays you from the business. However, no hurdle is impossible to overcome; bankers have more leeway here than with any other metric. Consistency is the key to success.
2 Point Highlight
Any number higher than 30 with your debt to income means that you have more than half of your income coming out of your paycheck every month, a value that might upset your entire financial world if you have a car accident or you get fired from your job.
The one exception to the 20 percent down payment rule occurs if you are insured as a borrower under the Federal Housing Administration (FHA) the United States Department of Veterans Affairs (VA), or some other government organization that drastically reduces your risk profile.
