In which situation would a lender not comply with underwriting guidelines of secondary market entities?

When a lender intends to keep the loan in its portfolio, it may not feel the need to strictly adhere to the underwriting guidelines set forth by secondary market entities. Typically, these guidelines are established to ensure that loans are of a quality suitable for sale on the secondary market, where they can be packaged into mortgage-backed securities or sold to investors.

In this situation, the lender takes on the risk associated with the loan directly and thus has more flexibility in its underwriting criteria. The lender might consider factors that align more closely with its own business model or risk appetite rather than the stringent requirements necessary for secondary market compliance. This can include variations in credit score thresholds, debt-to-income ratios, or other borrower qualifications that might otherwise limit loan acceptance in the secondary market.

In contrast, conventional loans are specifically designed with the intention of meeting secondary market standards. A lender intending to sell the loan quickly is motivated to comply with these guidelines to ensure it can sell the paper without issues. Lastly, while borrowers with high income may not automatically trigger non-compliance with underwriting guidelines, the overall financial picture still needs to be considered in alignment with the necessary guidelines for the secondary market.