Module 9: Comprehensive Loan Program Analysis

I. The Conforming Standard: Conventional Loans

Conventional loans are the most common mortgage product, following guidelines set by Fannie Mae and Freddie Mac. They are the benchmark for credit, income, and asset standards.

Mortgage Insurance (PMI) and Credit Requirements

The primary differentiator for Conventional loans is Private Mortgage Insurance (PMI), which is required whenever the borrower finances more than 80% of the home's value (meaning a down payment of less than 20%). Unlike FHA's Mortgage Insurance Premium (MIP), PMI is removable.

II. Government-Backed Programs: FHA, VA, and USDA

These programs are guaranteed or insured by a government agency, making them less risky for lenders and allowing them to offer more flexible terms, especially for credit and down payment requirements.

FHA Loans (Federal Housing Administration)

FHA loans are ideal for first-time buyers or those with lower credit scores. They are known for being highly credit-flexible, allowing for Debt-to-Income (DTI) ratios up to 57% in some cases, and accepting lower credit scores than Conventional loans.

• Down Payment: Requires a minimum of 3.5%.
• Mortgage Insurance (MIP): Requires an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP, which is permanent unless 10% or more was put down at closing. This permanence is a major financial drawback compared to Conventional loans.

VA Loans (Department of Veterans Affairs)

VA loans are the gold standard for eligible veterans, active service members, and surviving spouses. Their benefits are arguably the best in the industry.

• Zero Down Payment: 100% financing is available, with no private or public mortgage insurance.
• Funding Fee: Instead of MIP/PMI, a one-time VA Funding Fee is charged, which can be financed into the loan. This fee is waived for disabled veterans.

USDA Loans (US Department of Agriculture)

USDA loans, also offering 100% financing, are reserved for low-to-moderate-income buyers in eligible rural areas. They have both property location and income limits.

III. Non-Conforming: Jumbo and Non-QM

Non-conforming loans exceed the loan limits set by Fannie Mae and Freddie Mac (Jumbo) or use alternative methods to verify a borrower's ability to repay (Non-Qualified Mortgage or Non-QM).

Jumbo Loans

These are loans with balances too high for Conventional guidelines. Because they are not backed by the government or government-sponsored enterprises, they pose a higher risk to the lender and therefore have stricter underwriting requirements.

• Credit and Reserves: Require high credit scores (often 700+), larger down payments (10% to 20%), and significantly greater financial reserves (6 to 12 months PITI).
• Two Appraisals: It is common for Jumbo loans to require two full appraisals to confirm the property value.

Non-Qualified Mortgage (Non-QM) Loans

Non-QM loans are designed for borrowers who have non-traditional income or credit histories (e.g., self-employed individuals, real estate investors, or those with recent credit events). They do not conform to standard Qualified Mortgage (QM) rules.

The two most common Non-QM products are:

• Bank Statement Loans: Use 12 to 24 months of business or personal bank statements to determine the self-employed borrower's cash flow, replacing tax returns for income qualification.
• Debt Service Coverage Ratio (DSCR) Loans: For investment properties, these loans qualify the borrower based solely on the property's anticipated rental income relative to the PITI payment, ignoring the borrower's personal income and DTI.