Most people who are buying a home need a mortgage to do so. In fact, 80% of home buyers take out a mortgage to finance their purchase.[1] For first-time borrowers, figuring out what you need to qualify for a home loan can be daunting. However, understanding how different loans work and how lenders evaluate your finances can simplify the process and clarify the steps required to qualify for a mortgage and buy a home of your own.
Key Takeaways:
- Qualifying for a mortgage means showing a lender you have the financial resources to afford to repay the loan.
- Different loan types have different requirements for credit score, debt-to-income ratio and down payment.
- Making a larger down payment, increasing your credit score, paying down debt and earning more money will improve your chances of qualifying for a mortgage.
What Does It Mean To Qualify For A Mortgage?
Qualifying for a mortgage means showing the lender you can afford to repay the loan as agreed. Lenders evaluate borrowers by looking at their credit score, debt-to-income ratio, and how much of a down payment they can afford. Lenders also will order an independent appraisal to ensure the home is worth enough to justify the loan. Some loans have specific criteria all borrowers must meet, while others are up to individual lenders to set. Borrowers who satisfy the lender’s requirements qualify for a mortgage.
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How Do You Qualify For A Mortgage?
It’s important to start thinking about what type of home loan works best for you well in advance of shopping for a home to buy. You’ll want to think about what kind of loan fits your finances and choose a mortgage lender. Those decisions will determine the requirements you need to meet to qualify for a mortgage.
Decide Which Mortgage Is Best For You
It’s important to review your finances and see which type of loan you qualify for and can provide the terms best for you.
Conventional Loan
Conventional loans are the most common mortgages used to buy a home. Conventional loans can be conforming or non-conforming. Conforming mortgages meet specific federal requirements, including a maximum loan amount. They require a minimum credit score of 620 and a minimum down payment of 3% of the purchase price.
The most common non-conforming loan is the jumbo loan, which exceeds the conforming loan limit. Lenders are free to set the terms of non-conforming loans, so requirements vary.
FHA Loan
Federal Housing Administration loans are designed to help borrowers with lower credit scores afford a home. You can qualify for an FHA loan with a down payment of 3.5% and a minimum credit score of 580, or a down payment of 10% and a credit score of at least 500. FHA loans are ideal for first-time home buyers, but borrowers must pay upfront and annual mortgage insurance premiums.
VA Loan
Veterans Affairs offers mortgages for eligible members of the military, veterans and their surviving spouses. VA loans require no down payment, flexible credit requirements, lower interest rates, and financial aid for borrowers who default.
USDA Loan
U.S. Department of Agriculture mortgages help borrowers buy homes in specific rural areas. USDA loans are available only to borrowers where the household earns 115% or less of the area’s median household income. Borrowers are not required to come up with a down payment and can roll their closing costs into the loan.
Loan Requirements By Mortgage Type
| Loan Type | Minimum Credit Score | Minimum Down Payment | Maximum DTI Ratio |
|---|---|---|---|
| Conforming conventional loan | 620 | 3% | 50% |
| FHA loan | 500 with a 10% down payment or 580 with a 3.5% down payment | 3.5% | 57% |
| VA loan | VA has no requirements, but lenders may set their own. | 0% | None |
| USDA loan | USDA has no requirement, but most lenders require a score of at least 640. | 0% | 41% |
Prequalification And Mortgage Preapproval
In the early stages of preparing to buy a home, you may apply for prequalification with a lender. This is an informal estimate of how much the lender expects you can borrow based on the info you provide. This can help you figure out how much house you can afford.
When your finances are in shape and you’re ready to shop for a home, apply for mortgage preapproval. Your lender will verify your basic finances and provide a letter that says how much they expect you will be able to borrow. This letter helps you set a budget for buying a home and shows real estate agents and sellers you’re ready to buy.
Provide Financial Documents
When you’ve found a home you want to buy and made a successful offer, it’s time to officially apply for a mortgage. You’ll need to provide your lender with documents verifying your finances. Your lender also will review your credit score, calculate your DTI ratio, appraise your home and verify your identity.
It helps to gather documents in advance for your lender. Be prepared to give your lender:
- Identification, such as a driver’s license or passport
- Recent pay stubs to show income
- Tax forms from the past two years
- Checking and savings account statements
- Investment account statements
- Account statements for debts, including:
- Auto loans
- Student loans
- Credit cards
- Personal loans
- Down payment gift letters, if applicable
- Alimony or child support documents, if applicable
Minimum Credit Score
Your credit score indicates your reliability as a borrower. You earn an excellent credit score by paying bills on time, keeping debt to a minimum and paying off different types of debt.
You need a minimum credit score of 620 to qualify for a conventional mortgage. FHA loans allow borrowers to qualify with a minimum score of 580 with a 3.5% down payment or a minimum score of 500 with 10% down. Jumbo loans often require a score of at least 700.
Your credit score also affects the interest rate your lender may offer you. A higher credit score can earn you a lower rate on your mortgage, saving you a lot of money on interest.
Maximum DTI Ratio
Your DTI ratio measures how much of your income is earmarked for debt payments. If your debts use up too much of your income, you’re less likely to afford a mortgage payment.
Calculate your DTI ratio by dividing your total monthly debt payments by your gross monthly income. For example, say you make $4,000 in gross monthly income. You have an auto loan that costs $200 per month, a student loan with a $175 monthly payment, and you pay $1,400 in rent. Your total debt is $1,775, so your DTI ratio is $1,775 ∕ $4,000 = 44.4%.
Lenders typically require a DTI ratio below 36%, but it’s possible to qualify with a DTI as high as 50%.
Satisfactory Home Appraisal
As part of the underwriting process, your lender will order an independent appraisal of the home you’re buying. Your lender will not let you borrow more than the home is worth. If the home appraises in line with what you’ve agreed to pay for it, this step is drama-free. But if the home appraises for less than you’re paying for it, you may have to ask the seller to reduce the price, pay the difference out of pocket, or walk away from the deal if your offer included an appraisal contingency.
For example, suppose you ask to borrow $290,000 to buy a home but it appraises for $275,000. Your bank will lend up to $275,000 to finance the home, regardless of what you can negotiate with the seller. If you still want the property, you must either negotiate a lower price or pay $15,000 out of pocket.
Minimum Down Payment
Most loans require the borrower to make a down payment on their home. Conforming conventional loans require at least 3% down with a fixed-rate mortgage and 5% down with an adjustable-rate loan. If you put down less than 20% on a conforming loan, you must pay for private mortgage insurance until you have at least 20% equity in your home. FHA loans require at least 3.5% down, while VA and USDA loans have no down payment requirement. Jumbo loans typically require 10% to 25% down.
Closing Costs
You’ll need to pay closing costs in addition to your down payment when you buy a home. Closing costs include all the fees required to fund your mortgage and transfer legal ownership of the home. This often includes loan origination fees, appraisal fees, inspection fees, title search fees, title insurance, and document recording. Closing costs typically total 2% to 5% of the loan amount, so you’ll need to have saved up enough to pay them in addition to your down payment.
Other Financial Assets
Proof of assets assures your lender that you can afford to pay your loan even if you lose income or face unexpected expenses.
The following assets may help you qualify for a mortgage:
- Cash in your checking and savings accounts
- Retirement savings, such as an IRA or 401(k) plan
- Stocks, bonds or mutual funds
- Investment portfolios
- Property, including real estate, vehicles, jewelry and other valuables
Your lender will ask for documentation demonstrating the value of your assets.
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Tips On Qualifying For A Mortgage
Qualifying for a mortgage means proving you can manage the financial responsibilities of a mortgage. Here are some ways to improve your chances of qualifying for a mortgage.
Make A Larger Down Payment
Making a larger down payment has several benefits. You’re borrowing less money to buy the home, have more equity to start, and may avoid PMI. It also saves you money on interest. A larger down payment also can benefit borrowers with low credit scores, as lenders are more likely to accept a lower score when it comes with a more substantial down payment.
For example, if you put 5% down on a $300,000 home, you’d pay $15,000 at closing. A down payment of 10% or more can help you qualify for a mortgage because you’re borrowing less money from the lender. A 10% down payment on the $300,000 home would be $30,000, leaving you with $270,000 left to borrow and 10% equity in the home. With 20% down for a conventional loan, you can avoid PMI.
Lower Your DTI Ratio
If your DTI ratio is too high, you can reduce it with the following strategies:
- Pay down your debts. Credit cards, personal loans and other debts can eat up your budget and leave you with less money for a mortgage payment. Eliminating or paying down outstanding debts lowers your DTI ratio and frees up more income.
- Make more money. Whether you ask for a raise, get a side gig or change careers, a higher income will translate into a lower DTI ratio.
- Don’t take on more debt. Keeping your financial situation stable is key when trying to qualify for a mortgage. Adding debt will increase your DTI ratio and make it more challenging to get a mortgage.
Improve Your Credit Score
Taking time to increase your credit score will help you qualify for a loan. Improve your credit score by:
If you need a more diverse mix of credit, use score-boosting tools from reliable companies. They report payment of your monthly phone, cable and utility bills to credit bureaus.
Making on-time payments for at least the minimum due.
Paying down debts to reduce your credit utilization rate to less than 30%.
Being patient as you build your credit history. The longer you have a credit card or loan, the higher your score can grow.
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FAQ
Here are answers to common questions about how to qualify for a mortgage.
The Bottom Line
Qualifying for a mortgage means showing you have the resources to afford the loan. Lenders will consider your income, DTI ratio, credit score and assets to determine your eligibility. If you don’t qualify for a mortgage now, you can strengthen your application by paying down debts and improving your credit. You also can apply for government-backed loans if your credit score or income doesn’t meet the requirements for a conventional mortgage.
[1] Consumer Affairs (2024)
Ashley Kilroy
Ashley Kilroy is an experienced financial writer who writes for solo entrepreneurs as well as for Fortune 500 companies. She is a finance graduate of the University of Cincinnati. When Ashley isn’t helping people understand their finances, you may find her cage-diving with great whites or on safari in South Africa.
