Generally, there are two markets involved in mortgage lending: the primary mortgage market and the secondary market.  The primary mortgage market involves the making (originating) of loans directly to consumers by lenders.  The secondary mortgage market involves the sale of mortgage loans (made by lenders) to investors thereby allowing the lender to convert its long term mortgage holdings into cash for re-investment into new mortgages.

Secondary mortgage market operations are dominated by three agencies:

• FNMA (Federal National Mortgage Association)
• GNMA - Government National Mortgage Association
• FHLMC - Federal Home Loan Mortgage Association

Over the years, these major institutions have established lender guidelines for credit. Since most mortgages are sold to these major players, their underwriting guidelines have become the industry standard.  If your credit history does not meet these standards, you are considered a non-conforming credit loan and you will not be eligible for the best rate and terms offered (B, C, or D credit risk).

The following guidelines are a reflection of how Fannie Mae, the ultimate purchaser of most conventional mortgages, evaluates the credit portion of your application. 

FNMA Guidelines:

A borrower's credit report should demonstrate:

• past willingness to meet credit obligations
• an pattern of on-time payments 
• no derogatory information such as  bankruptcies, judgments, or collections

The lender will: 

• review the borrower's credit history over the last 7 years (with emphasis on the most recent 2 years)
• compare debts disclosed on the credit application with those shown on the credit report
• review the credit history for a sufficient number of accounts to rate the applicant on his/her willingness to repay

A borrower's credit history is generally considered acceptable if there have been no more than 2 revolving and 1 installment loan delinquencies over the past 12 months.

If your credit history is not acceptable to the lender you may still be eligible for a loan by making a larger down payment (usually an additional 10% to 20%) and/or by paying a higher interest rate on the loan.  Usually, this type of non-conforming loan is available from a mortgage banker or broker.  Although more expensive, you can usually keep the loan for one or two years and refinance later at a lower rate assuming your credit standing has improved.