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A BUYER GUIDE
General Approval Requirements
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
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:
- : 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.
- : 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.
- : 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.
- : You must have steady income and proof of employment for the last two years, with explanations for any frequent changes in employment.
- : 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.
- : 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.
- : 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.
- : 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.
- : Lenders require proof of steady income and will look at your employment history and earnings from the past two years most closely.
- : 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.
- : 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.
- : 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.
- : 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.
- : There’s no minimum income threshold to meet, although applicants must still be able to show proof of steady income.
- : 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.
: 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.
HomeReady®/HomePossible® loan requirements
: The government-sponsored agency Fannie Mae offers the HomeReady® mortgage program.
- : These programs are designed to help prospective homebuyers who have moderate to low income and limited cash for a down payment.
- : A minimum 3% can be from a borrower’s own funds or a gift.
- : 620 minimum
- : HomeReady® can also be a solution for homebuyers who don’t have a credit score because they have no credit history. They can substitute financial statements such as 12 consecutive months of on-time rental payments or other monthly payments that do not appear on credit reports, like utility bill payments.
- : The HomeReady and HomePossible programs can be approved with a debt-to-income ratio up to 50% with strong credit and other compensating factors such as extra savings and retirement funds for reserves.
: Freddie Mac manages the HomePossible® mortgage program.
- : HomePossible® is similar to the HomeReady® mortgage, but there’s a key difference: HomePossible®allows borrowers to include non-borrower income in their financial calculations — so income from another person or people living in the home can count toward the total monthly income, even if those individuals are not part of the mortgage loan. This often benefits homeowners caring for a family member living in the house who receives disability or Social Security, for example.
- : 620 minimum
- : There’s a minimum 3% down payment requirement, with added flexibility for the source of the down payment. HomePossible® guidelines now allow for the entire down payment to made from sweat equity, which means you can contribute your handyman skills instead of cash toward your down payment.
- : The maximum DTI is 43% with exceptions to 50% depending on the strength of your income, credit and whether you have extra funds in the bank (aka reserves) to make rainy day mortgage payments in the future.
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
- 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. Rent Own Sell Mortgage Brokers 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.