Although credit standards have relaxed somewhat since the peak of the financial crisis that began a decade ago, there are minimum standards you must meet to qualify for different mortgages.
Good credit scores, an acceptable debt-to-income ratio and specific financial documents are some of the things you’ll need to apply and qualify for a home loan.
The requirements largely depend on the type of loan you’re applying for, so we’ve broken down lending requirements for several types of loans in this guide.
FHA loan requirements
- Conventional loan requirements
- VA loans loan requirements
- USDA loan requirements
- HomeReady®/HomePossible® loan requirements
- Key mortgage documents
- Getting preapproved for a mortgage
- What Mortgage Amount Do you Need? $225,000
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FHA loan requirements
A mortgage through the Federal Housing Administration is one of the easiest home loans to get. Because the FHA provides insurance on the mortgage, FHA-approved lenders are often able to offer more favorable rates and terms.
Lenders are also more comfortable with potentially riskier borrowers, since the FHA is backing up to 90% of the mortgage. The lower down payment requirements with an FHA mortgage make it a good option for first-time homebuyers who may not have enough savings to make the typical 20% down payment on a home purchase.
These are the current minimum requirements for an FHA-approved mortgage:
- Down payment: There’s a minimum 3.5% down payment with a credit score of at least 580. A 10% down payment is allowed with a credit score between 500 and 579. The down payment can come from your own bank accounts, a gift from a relative, and even local down payment assistance programs.
- Debt-to-income ratio: The Department of Housing and Urban Development (HUD) sets the debt-to-income ratio for FHA mortgage programs. Currently, the front-end ratio is 31% and the back-end is 43%. Front-end ratio considers only housing-related costs, such as the monthly mortgage payment, property taxes and insurance. Back-end ratio looks at all monthly debt, including housing costs, car loans, credit card payments and any other recurring debt.
- Residence: The home must be your primary residence for at least the first year. This includes whether you are buying a single-family-home or a two- to four-unit property.
- Employment: You must have steady income and proof of employment for the last two years, with explanations for any frequent changes in employment.
- Mortgage insurance: Mortgage insurance is required regardless of down payment amount. You pay two mortgage insurance premiums on an FHA loan — the upfront mortgage insurance premium, and the monthly mortgage insurance, which you pay every month for the life of the loan.
- The upfront mortgage insurance premium is 1.75% of the loan balance due at closing and is usually financed into your loan. If you make the 3.5% minimum down payment, you’ll pay an annual fee of 0.85% of the total loan amount. This will be divided by 12 and is part of your monthly payment for as long you have the FHA loan.
Conventional loan requirements
A conventional 30-year or 15-year mortgage has slightly stricter qualifications than an FHA loan, but it does have some flexibilities and longer term benefits.
- Down payment: Some lenders may allow you to make a down payment of as little as 3% and qualify for a conventional mortgage, although mortgage insurance will be required. Some of these low down payment programs may have income limits, so be sure to check the address of the properties with your loan officer to see if it has restrictions.
- Mortgage insurance: With a conventional mortgage, you won’t need to carry and pay for private mortgage insurance (PMI) if you can make a down payment of at least 20% on the property. If you put down a lower amount, however, expect to pay around 0.15%-1.95% of your loan balance in PMI fees each year.One other benefit of conventional loans is once you’ve paid down the principal to 78% of the original value of the property, the lender must stop charging your mortgage insurance as long as your payments are on time. With an FHA loan, if you made a minimum down payment, the only way to get rid of your monthly mortgage insurance is to refinance your loan.
- Credit score: The minimum score for a conventional mortgage is 620, although some lenders may require a minimum score of 640. Keep in mind that higher (better) credit scores will entitle you to a more favorable interest rate and a lower monthly mortgage insurance payment on the mortgage.
- Employment: Lenders require proof of steady income and will look at your employment history and earnings from the past two years most closely.
- Debt-to-income ratio: As of the end of 2018, conventional lenders allow for DTIs up to to 50% in select cases. One caveat for anyone with debt ratios over 45%: Many mortgage companies are now requiring a minimum credit score of 700 for higher debt ratios.
VA loan requirements
A mortgage through the Veterans Affairs department benefits active-duty military personnel, reservists, veterans and their families. The VA guarantees a portion of the loan, which enables lenders to offer more favorable terms to military personnel.
- COE: To qualify for a VA mortgage you’ll also need a VA loan certificate of eligibility, which verifies the applicant meets military service requirements to be eligible for a VA mortgage. Specific documents and identification are required. Military personnel and veterans can apply online, through a lender or by mail after completing this form.
- Down payment: No down payment required.
- Mortgage insurance: VA loans don’t come with PMI fees; however, there is a funding fee associated, which is charged at closing and is usually financed on top of the loan amount. The amount of the funding fee will depend on whether the veteran is using eligibility for the first time. If the applicant has a disability related to his or her military service, the funding fee may be waived.
- Credit score: VA loans do not have a minimum credit score requirement, but most lenders that fund VA loans have a minimum cutoff of 620. The VA loan program only requires that the lender review the entire loan profile to make sure the veteran has the ability to repay the loan.
- Income: There’s no minimum income threshold to meet, although applicants must still be able to show proof of steady income.
- Debt-to-income ratio: To qualify for a VA loan, it is suggested that your debt-to-income ratio is not higher than 41%. Higher debt ratios can be approved since VA lenders also look at the veteran’s residual income, which is a calculation based on after-tax income, minus expenses and a monthly maintenance calculation based on the size of the house and the number of people in the veteran’s family.
USDA-guaranteed loan requirements
The U.S. Department of Agriculture offers a mortgage program to provide low- to moderate-income families the chance to own their own homes in designated rural areas. Applicants can build, rehabilitate, improve or relocate a dwelling in an eligible rural area. These rural designations are determined based on population, using 2010 U.S. census data.
The USDA-guaranteed loan program backs 90% of the loan amount, which allows USDA-approved lenders to consider borrowers who may not qualify for conventional home loans. USDA mortgage loans require a minimum credit score of 640 for automatic approval — provided other requirements are also met. However, homebuyers with lower credit scores can still be considered for a manually underwritten loan.
To qualify for a USDA mortgage, you must also meet the special eligibility requirements in your state. First, use the USDA’s online tool to determine whether the property you’re considering is within a designated rural area. To use this tool, you’ll need to enter the street address, city and state where the house is located. This confirms whether the home you wish to buy is within one of the USDA’s designated rural areas.
Then use this USDA map to select your state and determine the current income eligibility requirements. Income limits vary by city, county and family size.
The homebuyer must also meet these basic requirements to qualify for a USDA mortgage:
- Agrees to personally occupy the dwelling as their primary residence. The property cannot be used as a second home or rented out.
- Must be a U.S. citizen, noncitizen national or qualified alien.
- Can legally incur the loan obligation. This simply means the homebuyer has not been declared incompetent and has the capacity to understand the debt obligation and enter into legally binding contracts.
- Has not been suspended or banned from participating in federal programs.
- Shows a willingness to meet credit obligations on time.
- Purchases property that satisfies all USDA program criteria, including location within a rural designated area.
- Debt-to-income ratio: The standard DTI ratios for the USDA home loan are 29%/41% of the applicant’s gross monthly income. The maximum allowable DTI on a USDA loan is 32%/44% of the gross monthly income if all applicants on the loan have a credit score of at least 680. The USDA allows those higher ratios under some circumstances it considers on a case-by-case basis. The waiver to a higher ratio must be requested and documented by a USDA-approved lender.
Key mortgage documents
Before applying for a mortgage, you can make the process flow much smoother for yourself by organizing all the financial documents and other paperwork lenders typically require with the loan application.
These can include:
- A signed purchase agreement with the seller
- W-2s for all employment going back two years
- Pay stubs for the last 30 days
- Bank statements for the last 60 days
- Tax returns going back two years
- Proof of homeowners insurance
- 1099 forms if you are self-employed
- Documented dividends, stock earnings and other sources of income
- Proof of bonus income
- Pension statements
- Securities documents such as stocks, bonds and life insurance policies
- Social Security or disability income award letters, if applicable
- Some lenders may request written verification of your salary and position, printed on your employer’s company letterhead. They may also send a verification of employment form for your employer’s human resources department to complete.
Getting preapproved for a mortgage
Before house shopping, it’s a good idea to find out how much you potentially qualify to borrow. That means you’re not wasting time looking at homes outside your price range. A mortgage preapproval means a lender has looked into your credit history, income stability and your current finances, and is tentatively prepared to loan money to you for a house.
To get a preapproval letter from a lender, you’ll need to provide:
- Your identification, including Social Security number
- All pages of the two most recent, consecutive months of bank statements
- Employment verification, consisting of either a month of pay stubs or W-2s going back two years (or tax returns if you’re self-employed)
- Lenders will also pull your credit report.
A mortgage preapproval is usually good for up to 90 days. After that, creditors usually want to take another look at your finances to see if anything has changed.
Don’t worry about getting several inquiries to your credit if you get preapproved by several lenders. They will only count as one hard inquiry if you do them within a short time frame (15 to 45 days typically).
Buying a home is a major financial commitment and for many people, the culmination of a lifelong dream. LendingTree can help you compare mortgage products and offers. The road to homeownership may be long, but it doesn’t have to be a bumpy ride. By arming yourself with information in advance about the different loan programs available and the minimum requirements of each, as well as knowing what financial documents you’ll need, you’ve already taken important first steps to a smoother mortgage processing journey.
Buying a house can be an exciting and emotional process. Before starting your home search, you’ll want to understand the ins and outs of the home buying process. This will empower you to make decisions that are the best for your family — and your wallet.
What to consider:
Is now a good time to buy a house?
Based on mortgage and home-price trends, it’s a relatively good time for potential homebuyers. There are opportunities to lock in an affordable mortgage before interest rates begin to climb, as some experts think they soon will begin to do. The 30-year fixed-rate mortgage recently fell below 4 percent. That compares favorably with 4.88 percent a year ago.
Home prices, meanwhile, aren’t getting any cheaper. Annual home price growth is expected to increase by 5.4 percent by July 2020, according to real-estate data firm CoreLogic. Waiting too long to buy might mean getting priced out of more-desirable neighborhoods.
Who should buy a house?
Taking the leap to homeownership can provide a feeling of pride while boosting your long-term financial wellness, if you go in well-prepared and with your eyes open.
When thinking about buying a home, consider whether you want to put down roots or maintain flexibility with your living situation. How secure is your job, and can you comfortably budget for home repairs and maintenance on top of monthly housing payments? Finally, are you ready to stay in one place and do you have kids or family members to consider?
When should I buy a house?
Spring is the traditional start of the home-buying season, with many listings hitting the market, but it’s also a competitive time of year. Buyers can sometimes snag great in the off-season, such as the dead of winter or on holidays when fewer people are looking.
More important than the season, though, is your own financial readiness. This means having your finances organized and your credit in order so that you’ll be able to secure a reasonable mortgage in a smooth fashion.
In addition to a down payment, potential home buyers should have enough money set aside to cover the closing costs, which can range from 2 percent to 4 percent of the purchase price.
When budgeting for the monthly payments, factor in not only the principal amount and interest, but also property taxes, homeowners insurance, homeowners association fees and (if putting down less than 20 percent) private mortgage insurance. Don’t forget to set aside money for ongoing maintenance and those unexpected repairs that are bound to pop up.
Here’s a step-by-step guide on buying a house:
- Understand why you want to buy a house
- Check your credit score
- Create a housing budget
- Save for a down payment
- Shop for a mortgage
- Hire a real estate agent
- See multiple homes
- Make an offer
- Get a home inspection
- Negotiate repairs and credits
- Secure your financing
- Do a final walk-through
- Close on your house
Key takeaways:
- Make a list of what’s important to you in a home. Are you craving stability? Is location the top priority? Any must-have amenities?
- Does it make sense for you financially? Would renting for another year or two improve your financial standing?
- Are you prepared for the responsibility of maintaining a home?
The better your credit history, the better the chances you’ll have of securing financing with the best terms and rates.
Primary Financial Requirements for Purchasing a Home
Getting a home inspection prior to closing can reveal hidden problems with the home.
Owning a home gives you freedom, privacy and tax deductions for your property taxes and mortgage interest. According to Habitat for Humanity, the children of homeowners do better in school, have fewer discipline problems and go on to earn more money than children of non-homeowners. But before you can buy a house, you have to get your household budget in order.
Gather Your Information
“Every lender has its own checklist of personal and financial information that it requires before approving your mortgage loan,” says real estate agent Anita Cordell. At a minimum you’ll likely need your Social Security number; addresses going back at least two years; current and past employment information; verification of your current income, such as check stubs; banking information, including types of accounts and the assets in those accounts; federal income tax returns for the past couple of years; and information about your living expenses and other debts. “Gathering your basic financials into a single folder will make the process go smoother,” she adds.
Demonstrate Sufficient Income
“You must be able to show your lender that you have sufficient income to make your mortgage payments as they come due,” says Cordell. Each lender has its own standards, but most use a formula to determine a qualifying ratio that you must achieve before they will make the loan. Qualifying ratios typically range from 26 to 29 percent of your gross monthly income, depending on whether you’re going for a conventional or government-backed loan, such as FHA or VA. For example, you’ll need a gross monthly income of $4,000 to qualify for a mortgage loan with a payment of between $1,040 and $1,160, including principal, interest, property taxes and homeowners insurance.
Control Your Debt
Paying down your existing debt before you apply for a mortgage loan can help the process. The more debt you carry, the less home you can buy. Lenders combine your housing expenses with your long-term debt, meaning any debts you carry for over 11 months, to come up with another qualifying ratio. Depending on whether you’re applying for a conventional or government-backed loan, these ratios range from around 33 to 41 percent, so if you’re carrying significant long-term debt, it can reduce the amount of mortgage debt you can qualify for. For example, with an FHA loan, if you make $4,000 per month, your combined mortgage payment and long-term monthly debt payments can’t exceed $1,640.
Keep Your Credit Score High — and Accurate
Before a lender will give you a mortgage loan, it wants to know that you have the ability to make your monthly mortgage payments, and that you have the willingness to do so. Your willingness to repay your debts is typically reflected by how you have handled your debt obligations in the past. Your lender will check your credit report to see how you’ve done. You have the right to check your own credit report from the three major credit reporting companies, free of charge, once per year. “Your credit report is not always accurate, so it’s a good idea to check before your lender does, just to make sure there are no surprises,” Cordell advises. “That way, if you find errors you can correct them before they cause problems with the mortgage lending process.”
Save a Down Payment
Mortgage lenders like to know that you have a commitment to the home you want to buy. Your down payment is your skin in the game. Conventional lenders typically ask for a 20 percent down payment, but if you apply for a government-backed loan, your down payment might be as low as 3.5 percent, or even less. If you want to buy a $200,000 home with a conventional loan you’ll need a down payment of around $40,000. If you go through an FHA lender you would only have to put down around $7,000. The trade-off of making a lower down payment is that you’ll carry a larger loan balance, which results in a higher monthly payment. You’ll also be required to carry mortgage insurance, which will also add to the amount of your monthly payment.