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Conventional lending covers a wide swath of the residential mortgage industry, as it includes both fixed-rate and adjustable-rate mortgages, conforming and non-conforming loans and nearly everything else that isn’t guaranteed by the U.S. government. As such, it has long dominated the residential mortgage market, but even more so since the housing crisis and subsequent tightening of credit standards.
This past July, conventional loans accounted for 65 percent of the mortgages originated1, according to the Ellie Mae Origination Insight Report. And no wonder, as conventional loans had the highest closing rate at 72.1 percent. These numbers are reflected in the often narrow offerings of today’s wholesale lenders. These lenders dictate strict guidelines and requirements for their conventional loans, and show little interest in investigating the realities of more complex loan scenarios.
But as more and more brokers and originators jockey for the perfect conventional loans, they may be overlooking the borrowers—and lenders—that can help them close more loans. With some larger banks leaving the wholesale space, mortgage brokers have the opportunity to expand their business with new lenders that can manage more complex conventional financing beyond the typical loan scenario.
Conventional does not equal simple
Mortgage brokers recognize a good loan prospect when they see one: A borrower with great credit, a 20 percent downpayment and a steady job with a good income. For a mortgage broker with this borrower, finding a conventional loan is just a matter of securing the best rate for their customer. But not all borrowers meet these criteria. Many have a more complex credit history or a less traditional source of income. For these borrowers, mortgage brokers may have a harder time finding a lender that will provide financing.
Some wholesale lenders don’t want the additional time and effort it takes to underwrite more complicated financing scenarios, such as:
►A self-employed borrower with good/great credit and cash on hand for purchase
►A borrower with income from child-support payments
►A borrower with income that isn’t great, but who has a lot of assets
►A borrower seeking the lowest possible monthly payment for the first few years of the mortgage
►A borrower needing a mortgage on a partially completed home
►A borrower seeking a cash-out refinance after the home was listed for sale, but then taken off the market
►A self-employed borrower looking to refinance, with equity in the home
All of these scenarios are conventional loans. But they may require more attention from a conventional lender.
A closer look
If you consider just the first scenario of a self-employed borrower, it doesn’t seem like it should be a stretch for conventional lenders. Good credit, good down payment, good to go, right? Not necessarily. According to Fannie Mae’s underwriting factors and documentation for self-employed borrowers2, a lot more information is required, as well as more documentation. Following Fannie Mae’s guidelines, these factors should be analyzed for a self-employed borrower:
►Business location and nature
►Product or service demand for the business’s focus
►Financial strength of the business
►The income potential of the business: that is, whether the business can keep generating and distributing sufficient income so the borrower can meet the mortgage commitment
Some lenders see the need for this kind of in-depth analysis and shy away, making it difficult for mortgage brokers to secure the financing their client needs. But financing is possible if the borrower, broker and lender are willing to take the extra time to procure the necessary documentation. Required documentation would include in this scenario, two years’ of federal income tax returns (both business and personal), written analysis of the borrower’s personal income and business income and potentially a business cash-flow analysis, if the borrower intends to use business funds for the downpayment or closing costs.
If you look at the next scenario—a borrower with income from child-support payments—it, too, doesn’t seem that complicated, as it’s just income from another source. But it requires extra documentation as well, which many lenders don’t like because of the extra work, and potentially extra risk, it entails. Conventional lenders and the government actually have similar standards on verifying income from alimony or child support, and they include3:
►Documentation that the child support and/or alimony income will continue for at least three years after the mortgage application date; must be an official legal document
►Documentation of at least six months of regular payments being made to the borrower
►Review of the payment history to determine if it is suitable as a stable qualifying income
Some lenders may be concerned about the eligibility of this borrower because many couples may have “informal” agreements as to child-support payments, which means they are not a stable source of income. In addition, how much of the borrower’s income is represented by the child-support or alimony payments is another factor. For many lenders, if the payments comprise more than 30 percent of the borrower’s qualifying income, additional documentation is required, often including documentation of a full year of complete, on-time payments. All this does not mean, however, that this borrower is not a good candidate for a conventional loan—although that is how some lender’s guidelines interpret this situation.
Just by looking at these two possible scenarios, it’s apparent that not all conventional lending is created equal. There is a wide variety of borrowers out there, and their needs may not be met by the typical conventional guidelines of many wholesale lenders. Luckily, some lenders do understand how to operate beyond straightforward conventional lending scenarios.
Finding the right lender
Mortgage brokers often work with an array of lenders—some who work exclusively with U.S. Department of Veterans Affairs (VA) loans, or construction loans or some that only do conventional lending. Partnering with a lender can be a complicated process, but mortgage brokers who want to serve the most clients—from straightforward purchase loans to more complicated cash-out refinances—should seek lenders that have the same objective.
When lenders list the types of loans products they offer, brokers should take the time to make sure they fully understand just what lenders mean by their lists. If a lender provides Federal Housing Administration (FHA), VA and conventional loans, examine their underwriting guidelines to see if they follow the broader guidelines of the government, or Fannie Mae or Freddie Mac or if they instead place additional requirements on their borrowers. Talk with other brokers who have worked with a particular lender to determine if they have a rigid set of requirements or if they look at the entirety of loan scenarios. Consider talking with someone at the lending institution, especially if you have a particular scenario in mind. By taking these steps, you can find a lender that meets your needs and the needs of your clients.
Mortgage brokers should partner with lenders that offer conventional lending that provides financing for a wide variety of borrowers, not just one small subset. Conventional lending ranges from the everyday, uncomplicated borrower to those with more challenging financing constraints. Look for a wholesale lender eager to work with you and your clients to secure them a mortgage, whether they are self-employed, a borrower with child-support income or some other variation that may require more time and documentation.
For many lenders, any loan that doesn't fit into their rigid criteria is rejected out of hand, but mortgage brokers know there are many potential borrowers out there who are conventional loan prospects, even if they are more complex from a financing standpoint. There are financing options available to mortgage brokers working with these clients, but brokers must be willing to put in the work to discover the lenders that take on these challenges by offering a wide variety of loan products and services to provide financing for not entirely traditional borrowers.
Rey Maninang is senior vice president and national sales director of Carrington Mortgage Services LLC’s Wholesale Mortgage Lending Division. Under Rey’s leadership, Carrington’s Wholesale Division has increased volume production by over 100 percent within a two-year period, and successfully launched several strategic initiatives resulting in consistent profit increases.
This article originally appeared in the September 2016 print edition of National Mortgage Professional Magazine.