Don’t Meet the Conventional Mortgage Requirements? You Still Can Get a Loan
If you’re planning on buying a house, you’re probably aware of the hurdles that stand in your path to getting a mortgage. Qualifying for a home loan can be an uphill task, thanks to the strict federal regulations that came into effect in the wake of the housing bust.
That’s especially true if you’re considered to be 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 credit score, verifiable income, and an appealing debt-to-income (DTI) ratio.
The good news is that even if you don’t qualify for conventional financing, there are still several solutions available, including Beyond by Embrace. Before we take a detailed look at some of these alternative solutions, let’s explore a few reasons why you may not qualify for a conventional home loan.
First, Let’s Define “Conventional Mortgages”
A conventional mortgage is essentially a form of home loan that lacks the backing of a governmental entity, and it is initiated and managed by private financial institutions such as banks, credit unions, and other non-governmental financial entities.
Conventional mortgages come in two varieties: conforming and non-conforming. Both options offer their advantages, and each type has distinct eligibility criteria.
Distinguishing Between Conforming Conventional Mortgages and Non-Conforming Mortgages:
Conforming Conventional Mortgages
- Comply with income and down payment criteria set by Fannie Mae and Freddie Mac.
- Loan limits determined by the Federal Housing Finance Administration (FHFA).
- Lenders can sell these mortgages to Fannie Mae and Freddie Mac.
- This practice frees up lenders’ capital for extending more mortgages.
- Generally, lower risk due to adherence to established guidelines.
Non-Conforming Conventional Mortgages
- Do not meet government agency requirements.
- Example: Jumbo mortgages for amounts exceeding conforming limits.
- Other instances: Designed for borrowers with high debt, poor credit, bankruptcy, or high loan-to-value ratios.
- Carry higher interest rates due to increased risk.
- Require greater insurance coverage.
- Involve higher closing costs and additional fees.
3 Reasons You May Not Qualify for Conventional Mortgage
Most lenders are averse to unconventional borrowers. But what makes you an unconventional borrower:
1. Unclear Source(s) of Income
Your income is one of the biggest factors in determining whether you will qualify for a home loan.
Mortgage lenders prefer borrowers who have both stable and traceable income. That means if you have an unclear, unreliable, or complex source of income, you may not qualify for conventional financing.
This is why many self-employed people are unable to qualify for home loans, despite the fact that they are able to pay the monthly mortgage payments.
Among the various types of non-traditional borrowers, we find:
- Self-Employed or Small Business Owners: Individuals running their own businesses, often with variable income.
- Gig Workers, Freelancers, or Consultants: Those in the gig economy who rely on project-based work.
- Commission or Cash Based Earners: Individuals who earn income through commissions or cash transactions.
- Non-US Citizens: Borrowers who may not have US citizenship but still seek loans.
- Seasonal Workers: Individuals whose income fluctuates with seasonal employment.
- Retirees and Investors: Those who may have unconventional income sources like investments or retirement savings.
2. Bad Credit History
A mortgage lender can — and will — look at your credit history to determine how much of a risk you are.
Most lenders won’t approve if your FICO score is less than 620. And according to a leading loan software company, the average credit score for homebuyers who qualify for conventional financing is 720.
Keep in mind that lenders aren’t just looking at your credit scores, however. They are looking at whether you pay your bills on time and how much revolving credit you have, as well as whether you have any prior bankruptcies and/or foreclosures. If your credit cards are almost maxed out and/or you have a history of late payments, you won’t qualify for a conventional mortgage.
The same is true if you’ve had a recent bankruptcy or foreclosure.
3. Insufficient Employment History
Before you are approved for a loan, your lender will want to know that you can hold down a job. After all, how will you be able to make your monthly mortgage payments if you aren’t gainfully employed?
As such, it’s important to have a consistent employment history of at least 2 years. While you don’t necessarily have to be employed with the same company for at least 24 months, the longer the tenure you have, the more favorably it is viewed.
Government-Supported Loan Alternatives
There are several mortgage options available if you don’t fit into the underwriting guidelines of a conventional home loan.
One of the most popular options is a government-backed loan. Government-backed loans protect against loss through a government insurance program. The most common government-backed loans include:
- FHA Loan – Insured by the Federal Housing Administration (FHA), FHA loans were introduced in 1934 to help resuscitate the U.S. housing market following the Great Depression. Part of this program’s appeal is that you can qualify with a FICO credit score as low as 580.
- USDA Loan – This is an ideal loan if you are looking to settle in a less-populated, rural area in the United States. USDA home loans are insured by the U.S Department of Agriculture under its 100% financing program, and are designed to help home buyers with lower incomes in rural areas and certain suburban areas. To be eligible for a USDA loan, your household income should be within the USDA’s specified income limits in your county.
- VA Loans – Insured by the U.S. Department of Veteran Affairs, VA loans are another great option if you are an unconventional borrower. You can qualify with a FICO credit score as low as 580, and you don’t need any down payment. You won’t pay mortgage insurance either. In order to qualify, you must have served in the National Guard, U.S. Military, or Reserves, or currently be a serving member.
Unveiling a Non-Conforming Mortgage Solution
What exactly are non-conforming mortgages? These are home loans that do not align with all or some of the criteria required for purchase by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that play a significant role in the U.S. mortgage market.
Non-conforming loans can take this label for a variety of reasons. The most common factors include:
- The loan amount exceeds the conforming loan limits, which currently stand at $726,200 in most parts of the U.S. as of 2023.
- Borrower characteristics like credit scores and debt-to-income (DTI) ratios fall outside the qualifying standards for conforming loans.
- The loan features a non-traditional structure, such as an interest-only mortgage or a term other than the conventional 15 or 30 years.
Empowering Non-Traditional Borrowers with Ultimate Flexibility
Embrace Home Loans® offers a versatile solution for non-traditional borrowers in search of a home loan. Whether you’re in need of a no doc mortgage or require limited income verification, our lite doc loan and other non-traditional mortgage programs provide a viable path forward. These unconventional mortgage offerings, which do not necessitate W2s or tax returns, cater to individuals with irregular or challenging-to-document income sources.
That’s why we’ve introduced Beyond by Embrace, an innovative program featuring purchase and refinance loan options meticulously designed to accommodate borrowers facing circumstances that might otherwise hinder them from obtaining financing through a conventional lender.
About Beyond by Embrace
Beyond is perfect if you are self-employed and have good credit and substantial savings in the bank, but are unable to prove your income in the traditional way most lenders require. Through the Beyond Program, we can use your business’s cash flow on bank statements as a qualification for income, as opposed to what is reported on your tax returns.
If your DTI is above 36%, you may also be a good candidate for Beyond by Embrace.
- You can qualify for a mortgage of up to $2 million.
- You can qualify with a FICO credit score as low as 580.
- You can qualify if 2 years have passed since you experienced a bankruptcy or foreclosure. Most lenders require at least 4 years.
- Eligible properties include non-warrantable condominiums with higher concentrations of commercial units.
- You can expect your loan to close in less than 21 days, while the industry average is about 40 days.
- Conventional loans normally require Private Mortgage Insurance (PMI) if you put less than 20% of the purchase price down. The Beyond Program, on the other hand, doesn’t require any type of PMI.
A World of Possibilities Awaits!
Don’t let hurdles in your financial history hold you back – there’s a bright path to homeownership for you. While traditional lenders might hesitate if your FICO credit score falls below 620, your income is challenging to verify, or you’ve faced recent setbacks like bankruptcy or foreclosure, it’s time to shift your perspective.
Explore a wealth of opportunities beyond the conventional route. Government-backed mortgages such as USDA, FHA, and VA loans can be tailored to fit your needs, with more flexible criteria than you might expect. However, if those options still don’t align with your unique circumstances, look no further than Beyond by Embrace.
With Beyond, we’re here to turn your homeownership dreams into a joyful reality. Embrace the journey and discover a world of mortgage possibilities that won’t leave you behind.