Don’t Meet the Conventional Mortgage Requirements? You Still Can Get a Loan

Buying a home is exciting — but let’s be honest, it can also feel like learning a new language. And the first step — qualifying for a home loan — can be daunting. Strict federal regulations that were put in place after the housing bust have made it even more challenging.

This is especially true if you’re considered an unconventional borrower. While you may have the capacity to make your monthly mortgage payments, most lenders won’t approve your loan if you don’t meet the baseline requirements for a Conventional mortgage, including a certain credit score, verifiable income, and a satisfactory debt-to-income (DTI) ratio.

The good news is that even if you don’t qualify for Conventional financing, there are several other loan options available. But before we look at alternative solutions, let’s explore why you may not qualify for a Conventional loan.

What is a Conventional mortgage?

Conventional mortgages are loans that are not insured or guaranteed by the federal government. They’re offered by banks, credit unions, and private lenders. Conventional mortgages come in two varieties: conforming and non-conforming. Each option has advantages and distinct eligibility criteria.

Conforming Conventional loans comply with income and down payment criteria set by Fannie Mae and Freddie Mac. These loan limits are determined by the Federal Housing Finance Administration (FHFA).

Non-conforming Conventional loans do not meet government agency requirements. They carry higher interest rates and require greater insurance coverage due to the increased risk.

Some reasons you may not qualify for a Conventional mortgage:

Your income is inconsistent or untraditional.

Many borrowers are unable to qualify for home loans because their income is considered unconventional. Various types of nontraditional borrowers are:

• Self-employed borrowers
• Small business owners
• Contract workers, freelancers, and consultants
• Non-US citizens
• Seasonal workers
• Retirees and investors

You have poor credit history

Mortgage lenders will look at your credit history. Most lenders won’t approve a Conventional loan if your FICO^® Score is less than 620. Keep in mind that lenders aren’t just looking at your credit score, though. They also want to see if you have a history of late payments, your credit cards are maxed out, and whether you have any prior bankruptcies or foreclosures.

You have insufficient employment history

It’s important to have a consistent employment history of at least two years. While you don’t have to be employed with the same company for 24 months, the longer the tenure you have, the more favorably it is viewed.

Government-backed mortgages

If a Conventional loan is out of reach, these can be great alternatives. They’re backed by federal agencies, which means lenders are more flexible with credit and income requirements. These include:

FHA loans (Federal Housing Administration)

• Great for first-time buyers
• Credit scores as low as 580 (or even 500 with a larger down payment)
• Down payment as low as 3.5%
• Requires mortgage insurance

VA loans (Department of Veterans Affairs)

• Available to veterans, active-duty service members, and some spouses
• No down payment required
• No mortgage insurance
• Competitive interest rates

USDA loans (U.S. Department of Agriculture)

• For buyers in eligible rural or suburban areas
• No down payment required
• Income limits apply

Non-Conforming mortgage solutions

Non-conforming home loans do not align with the criteria required for purchase by Fannie Mae and Freddie Mac. The most common reasons a loan is considered non-conforming are:

• The loan amount exceeds the conforming loan limits, which are set by the government each year.
• Borrower characteristics, like credit scores and debt-to-income (DTI) ratios, fall outside the qualifying standards.
• The loan features a nontraditional structure, such as an interest-only mortgage or a term other than the typical 15 or 30 years.

Empowering non-traditional borrowers with flexibility

Embrace Home Loans offers solutions for borrowers who fall outside the traditional guidelines. Beyond by Embrace was created for people with unique financial circumstances that may otherwise prevent them from securing a loan with a more traditional lender.

Beyond lets borrowers show cash flow from their bank statements instead of only what is reported on their tax returns. It’s ideal for:

Self-Employed borrowers using business cash flow or bank statements instead of tax returns.

Borrowers with credit events, including foreclosure, modification, short sale, or deed-in-lieu.

Real estate investors, new or experienced, financing their first or next property.

Don’t let your financial history or outside-the-box career path stop you from buying a home. There are flexible mortgage options available — and lenders that will work with you to understand your whole story and find a mortgage that fits your unique lifestyle.