Loan Underwriting Rules

MORTGAGE RULES & BASICS (Rules may not apply in all scenarios, and may change at any time.)


  • 5% down on a 1 unit Conforming
  • 5% down on a 1 unit Conforming High Balance
  • 20%-25% down on a 2-unit Conforming owner-occupied (varies depending on loan size)
  • 25% down on 3-4 units Conforming owner-occupied
  • 20%-25% down for Investment Property, Conforming
FHA: 3.5% down payment is the minimum
VA: Veterans loans are 0% down payment (unless you go over the area VA loan cap)

Conforming Conventional

*Any home that is a 5 unit building or more is considered a commercial loan, which is a whole different set of mortgage rules entirely. You would need to contact a commercial mortgage lender for those details.

Jumbo Loans:

  • Any loan amount above the agency loan limits is considered a Jumbo loan.
  • There are many different loan amount limits and down payment requirements for Jumbo loans, which usually require a minimum of a 20% down payment. Contact a mortgage lender for details.

FHA Loan Limits

  • FHA loan limits vary by county: FHA Loan Limits.
  • *Any loan amount above the FHA loan limits is considered a Jumbo loan and FHA financing would not be available.

VA (Veterans Affairs) loans

For VA loan limits see VA Loan Limits.


Debt ratios

Credit scores can impact debt ratios now. It used to be you could not spend more than 28-33% of your gross monthly income on a mortgage payment. Now, you need to plug all the buyer’s financials into the “automated underwriting” system, and see if the system approves the loan or not. I have seen loans get approved with 40%, 45% and even higher debt ratios.


  1. Salaried borrowers would just use their gross salary. However, if there is a gap in employment, they may need 60 days on the new job. A larger gap like 1-2 years may require 6 months back on a new job before they’ll allow that person to use that income to get a loan.
  2. Commissioned borrowers would use a 2-year average of their “net income.”
  3. Self-employed borrowers would use a 2-year average of their “net income.”
  4. Borrower that have overtime or bonuses would use a 2-year average.

Automated Underwriting

Most loans are underwritten by a software program now, with a human underwriter reviewing the paperwork. Many times automated underwriting (AU) will allow for higher debt ratios than a human would have, and all in all has been a net benefit to the mortgage business. Make sure you always push for a loan officer to check and see if your clients have been approved by AU as early as possible, sometimes it’s valuable even during pre-approval.

Portfolio Loans/ Underwriting

There are very few portfolio lenders left. Well over 95% of all loans go through a government backed loan, such as FNMA, FHLMC or FHA and VA. If you have a client with creative needs you’ll need to find a lending source that is a non-government agency lender.


The key things to ask about when you are reviewing pre-approval letters are:

  • Is the pre-approval based on a “1 bureau” or a “3 bureau” credit report? It needs to be 3 to know what the middle score is, since this is ultimately what underwriters use.
  • Have all the income and assets been documented and reviewed?
  • Has the loan been run through any automated underwriting system, or has it been run by an underwriter?


Minimum credit scores

Credit scores have changed the way lenders look at the loan package. Much emphasis is placed on credit scores. The average range for conventional loans is 680 to 740. FHA will do loans with credit scores around 620-660. Anything above 780 is excellent. However, minimum credit scores change frequently, please check with me first before relying on these quotes.

Get all three credit scores! Do not trust a pre-approval based on just one score. If the three scores are 606, 619 and 644, and the lender has pulled only 1 bureau which is the 644 score, the real middle score is 619 and that loan would be rejected as an FHA or a Conventional, although you may find a pre-approval was granted because the loan officer did not pull a 3 bureau credit report.

What a higher credit score gets you, and what a lower score gets you

In general a higher credit score makes it easier to get your loan through underwriting. A lower credit score makes underwriting harder, and it may also cost you. On a Conventional loan it is likely that there will be higher mortgage terms for loans with lower credit scores.


Appraisal rules for comparables & other miscellaneous appraisal rules:

  1. It is preferred that comps are no more than 6 months old.
  2. I know it goes without saying, but, it is important that they are actually “comparable.“ I recently saw a Realtor comp a single family that has not been renovated for 20 years with no parking with a newly renovated duplex with a garage. I have seen people leap over 2 neighboring communities to pull a comp from 3 communities and 8 miles away. I have seen new construction compared with resale. Make sure the comps you rely on are comparable!
  3. On condos it is required, unless impossible, to have 2 of 3 comps be from within the subject property’s building. If there are none, then the appraiser is allowed to go to nearby competing condos for comps.
  4. Watch out for functional obsolescence. I got caught on a 2 BR/1BA where the bath was upstairs in a bedroom. Having guests go all the way upstairs and through a bedroom to get to a bathroom, is considered functional obsolescence. I fixed this by going to a portfolio lender who was willing to understand that this was common for the area, but the deal almost fell apart.
  5. A property that is very rough, a shell, or uninhabitable will not get through a traditional mortgage process. You’d need to consider a renovation loan.


FHA condo loans:

To see if a condo is FHA approved go to: FHA Condo Lookup Tool.

Investor level:

Investor level, which is the # of units owned by investors who rent them out, is important. Ask me how the investor level may impact your ability to get a mortgage. There are other questions to ask. Click here to read complete details on how a condo gets analyzed.


Seller concessions:

The following are the seller concessions that the seller can pay on top of splitting the transfer & recordation taxes.

  • Conventional: Sellers may pay up to 3% of the sale price towards borrowers’ closing costs, prepaids, and escrows on a 5% down payment. Sellers can pay up to 6% of the sale price to the borrower’s closing costs, prepaids and escrows on a 10% or 20% down payment.
  • On an investment property the maximum credit is usually 2% of the sales price.
  • FHA: the seller can pay up to 6% of the sales price towards closing costs.
  • VA: the seller may pay all of the buyer’s closing costs, prepaids, and escrows.

Termite inspection requirements:

  • FHA: always requires a termite inspection.
  • Conventional: usually a lender will not require a termite inspection on a Conventional loan unless it’s required per the sales contract or if the appraiser notes visible evidence of termite infestation and/or damage.


  • FHA: The cash for down payment and closing costs can come 100% from a gift.
  • Conventional: The cash for down payment and closing costs can come 100% from a gift.

Co-Signers, Help Or Not?

Some people think that getting a cosigner on a mortgage loan is a cure-all, and will automatically make someone qualify for the loan they seek. This is not so.

First, the cosigners will need to be scrutinized for their own income and debt load, and the qualifying numbers and debt ratios will still need to make sense. For example, if you have a cosigner that has a large mortgage of their own, two car loans, credit card debt, and student loans, I would doubt that their income is going to help in any cosigning situation.

Another important thing to note is that cosigning may not even be allowed on some loans, or may have a diminished benefit on others. For example, on an FHA loan a non-occupant cosigner is allowable. But on conventional FNMA loans a non-occupant cosigner is not allowed, or the bank will still require that the primary occupant qualifies for the bulk of the loan, allowing the non-occupant cosigner only to help qualify for a smaller part. On a Conventional loan you have to make sure the loan is backed by FHLMC, who does allow for a non-occupant cosigner to help carry all the debt ratios.

Disclaimer: These are basic guidelines that are used for informational purposes and are subject to change without notice.