Loans are categorized into two groups; FHA (Federal Housing Administration) loans and non-FHA loans. FHA loans are considered to be easier to approve for than non-FHA loans because the federal government insures the loan, making the risk of losing money significantly less to the lender. When there isn’t that much risk, then the lender can require less for a loan.
But if a loan is non-FHA, or another words, a “conforming loan”, then the standards of loan approval is much higher. The lender is taking on more risk because they are not getting insurance from the FHA to back the loan. Many Los Angeles Condos fall under this category because the condo projects are not FHA approved, so we are familiar with how to get our clients loans under this scenario. In order to approve for the conforming loan, this is what you will need at minimum.
First, you will need at least 10% down payment if you have a fico score of 720 or above. If you fico score is as low as 620, then you need to have 20% down payment.
Second, your down payment must be seasoned in your bank account for at least 2 months. If it’s not in there for at least that long, then there must be a paper trail indicating where those funds came from.
Third, you will need at minimum one year of documented proof of income. This usually takes form as “tax returns,” but lenders may take other proofs of income. It is much easier to approve for a loan if you have at least 2 years of documented proof of income.
Fourth once the payment is calculated, this amount plus your current debt cannot exceed 41% of your income. This means that if you are making $10,000 before taxes, and you have $1000 of debt you are currently servicing, the mortgage costs, (taxes, insurance, interest, and principal) cannot exceed $3100 because when you add the two, then $4100 (41%) is the maximum threshold for $10,000 of income.
Last, you must have at least two months of reserves for approval of a non-FHA loan. This means that if your payments are $3100 a month, you must have at least $6200 in your bank account for reserves.
So the five things you need for approval of a non-FHA loan is: 10% down payment, 2 months seasoned funds for that down payment, one year of documented income, a debt to income ratio of less than 41%, and two months of reserves.