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What Are the Qualification Requirements for a Mortgage?

  • Writer: Jennifer Wills
    Jennifer Wills
  • Aug 11
  • 5 min read
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I held a loan originator license while working as a licensed financial coach. I helped individuals and families who wanted to buy a home qualify for a mortgage.

 

The mortgage industry is complex and can be confusing. Understanding the qualification requirements for a mortgage can make shopping for a home less challenging. The following information can help.

 

Down Payment

Your mortgage down payment represents your initial investment in the home and determines the loan terms and conditions. A higher down payment reduces the amount you borrow, which affects the size of your mortgage and the equity in your home.

 

The benefits of a larger down payment include:

  • Reduced mortgage amount: Putting down a larger down payment means borrowing less, making your loan payments more manageable.

  • Lower interest rate: Lenders typically offer lower interest rates to borrowers who make larger down payments because of the decreased lending risk.

  • Avoidance of private mortgage insurance: Putting down at least 20% on a conventional loan eliminates the need to pay private mortgage insurance (PMI), which protects the lender in case of default and increases the cost of the home.

  • Increased equity: A substantial down payment means you own a larger portion of your home from the start, which can be beneficial if the home value fluctuates.

 

The down payment requirements depend on the type of mortgage you apply for:

 

Conventional loan

A down payment of 20% for a conventional loan is ideal. However, some conventional loans require 3% down for first-time homebuyers. Of course, putting down less than 20% requires paying private mortgage insurance (PMI), which protects the lender in case of default on the mortgage and increases the total cost of the home.

 

FHA loan

The Federal Housing Administration (FHA) insures government-backed mortgages for first-time homebuyers:

  • If your credit score is at least 580, you could qualify for a down payment of 3.5% on an FHA loan.

  • If your credit score is between 500 and 579, your down payment should be at least 10%.

  • Upfront and annual mortgage insurance is typically required for the entire loan term.

 

USDA loan

The U.S. Department of Agriculture (USDA) insures loans for moderate-income households that purchase or build in eligible rural areas. The USDA also issues loans to low- and very-low-income buyers in eligible rural areas and offers payment assistance. Although no down payment is needed for a USDA loan, an upfront guarantee fee and an annual premium for the life of the loan are required.

 

VA loan

The Department of Veterans Affairs (VA) offers loans to eligible veterans and active-duty service members with no down payment. You might be exempt from the significant one-time funding fee if you’re eligible for VA disability compensation for a service-connected disability or meet other conditions.

 

Credit Score

Your credit score indicates your financial history and creditworthiness to lenders:

  • Your credit score is derived from your credit report, detailing your credit history, including how you handled loans, credit cards, and other debts.

  • Your credit history is comprised of your payment punctuality, length of credit history, types of credit used, and current debt levels.

  • Lenders use your credit score to gauge the risk of lending money to purchase a home.

  • Your credit score impacts the mortgage terms and interest rate.


Your Fair Issacs Corporation (FICO) Score range is categorized like this:

  • Exceptional: 800 to 850

  • Very good: 740 to 850

  • Fair: 580 to 669

  • Poor: 300 to 579


Your credit score typically must fall within a specific range to qualify for a certain type of mortgage:

  • Conventional loan: Credit score of at least 620  

  • FHA loan: Credit score of at least 500, but 580 or higher to qualify for the 3.5% down payment

  • USDA loan: Credit score of at least 640  

  • VA loan: Credit score of at least 620

 

Income

Your income impacts the amount you can borrow for a home:

  • Most lenders look at pay stubs, W-2s, 1099s, profit and loss statements, and tax returns from the last two years to determine your income stability and earning trajectory.

  • Overtime payments, bonuses, dividends, Social Security, alimony, and child support count as income toward a mortgage.

  • Lenders might require a letter from your employer or other documentation to verify that the income is expected to continue for several years.

  • Lenders perceive steady employment and consistent income as indicators that loan payments will be made on time.

 

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is calculated by dividing your total monthly debt, including your proposed house payment, by your gross monthly income, and expressing the number as a percentage. For instance, if your proposed monthly mortgage payment is $1,500, and you pay $100 monthly for a car loan and $400 monthly for a student loan, your total monthly debt would be $2,000. If your gross monthly earnings are $6,000, your DTI ratio would be 33% ($2000 divided by $6000, multiplied by 100).

 

The impact of your DTI ratio when qualifying for a mortgage depends on your credit score, down payment, and cash reserves:

  • Conventional loan: The maximum DTI ratio for a conventional loan is 45%, but exceptions can be made for strong compensating factors.

  • FHA loan: FHA guidelines allow a DTI ratio of 43%, but higher ratios are allowed with compensating factors.

  • USDA loan: The USDA usually allows a maximum DTI ratio of 41% but might make exceptions for individuals with higher credit scores and stable employment.

  • VA loan: VA guidelines require a maximum DTI ratio of 41%, but lenders set their limits based on an applicant’s financial health.

 

Assets

Your assets can be converted to cash if you face financial hardship. The money can be used to pay for unexpected expenses, such as home repairs or medical bills, without defaulting on your mortgage.

 

Examples of assets include:

 

Documentation

Most lenders require the following documentation to consider extending a mortgage:

  • Employment verification

  • Tax returns from the past two years

  • Two years’ worth of W-2s, year-end pay stubs, or other evidence of income

  • Alimony documents

  • Child support documents

  • Bank statements

  • Statements of additional assets

  • Gift letters

  • Government-issued identification

  • Social Security number

  • Rental history and contact information

 

Property Type and Purpose

The type of home desired and its purpose impact your ability to secure a mortgage:

  • Purchasing a home to live in typically qualifies you for a lower interest rate and better terms than a vacation home or rental property.

  • A single-family house typically helps you secure a better interest rate than a condominium, co-op, manufactured house, log home, mixed-use development, or nontraditional architecture.

  • The home must meet minimum safety and livability standards.

  • The home must be appraised to ensure the value meets or exceeds the loan amount.

 

*This information is for educational purposes only.

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