Many first-time house hunters lie awake at night worrying, Will I qualify for a mortgage? With the wide variety of loan programs, down payment requirements, and credit thresholds out there, qualifying for a mortgage can feel like a lame choose-your-own-adventure story: “Didn’t prequalify? Return to page 1.”
Let’s take some of the mystery out of how to qualify for a mortgage.
6 Mortgage Qualification Factors
What goes into qualifying for a home loan can be especially confusing. Here are some things that may come into play when qualifying for a home loan.
1. Down Payment
Down payment requirements vary based on the type of mortgage you’re applying for.
Conventional Loan Down Payment
You may have heard that 20% down is the ideal. But the median down payment across all homebuyers is 13%. And some conventional loans require just 3% down.
The 20% figure comes from buyers trying to avoid the added cost of private mortgage insurance (PMI), which is required if your down payment is less than 20%. But you can also avoid PMI by seeking a “piggyback” mortgage or lender-paid mortgage insurance.
If you’re getting help from loved ones for your down payment, you’ll need to document that with a gift letter.
FHA Loan Down Payments
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. FHA loans are popular with first-time homebuyers. Over 80% of FHA mortgages are issued to first-time buyers each year.
If your credit score is at least 580, you may qualify for a down payment of 3.5% on an FHA loan. (FHA 203(k) loans for fixer-uppers also ask for 3.5% down.) With a score between 500 and 579, you’ll need at least 10% down.
Upfront and annual mortgage insurance is required for FHA loans, usually for the entire term.
USDA Loan Down Payment
A loan insured by the U.S. Department of Agriculture is aimed at moderate-income households that purchase or build in eligible rural areas. Incredibly, no down payment is required. The USDA also directly issues loans to low- and very-low-income buyers in eligible rural areas and provides payment assistance.
USDA loans require an upfront guarantee fee and an annual premium for the life of the loan, but it’s lower than FHA loan mortgage insurance rates.
VA Loan Down Payment
The great perk of VA loans is that no down payment is usually required, but a sizable one-time funding fee is. (You may be exempt from the funding fee if you’re eligible for VA disability compensation for a service-connected disability or meet other conditions.)
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2. Credit Score
Credit scores attempt to distill an individual’s financial history down to a single number that indicates your worthiness to lenders.
The FICO® Score range of 300 to 850 is categorized like this:
• Exceptional: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579
Borrowers seeking a conventional loan will likely need a credit score of at least 620. For an FHA loan, applicants with a score as low as 500 may be considered. But 580 is the minimum credit score to qualify for the 3.5% down payment advantage.
A USDA loan usually requires a score of 640; a VA loan, a minimum of 580 to 620. In some cases, you don’t have to have a FICO Score to qualify for a home loan. Fannie Mae’s nontraditional credit program and government loan programs allow for a credit profile to be built based on things like rent payments and utility bills.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Technically, there’s no minimum income required to apply for a mortgage. But your income can limit the amount you’ll qualify for. Lenders also like to see evidence that your income is stable, and will look at an applicant’s last two years of employment. That means you’ll need to provide pay stubs, W-2s or 1099s, and tax returns.
Many types of income count toward a mortgage application: overtime, commissions, bonuses, dividends, Social Security, alimony, and child support. Lenders may ask for documentation (such as a letter from your employer) that such income is expected to continue for the next several years.
Self-employed homebuyers should keep in mind that lenders look at your income after deductions. Taking too many deductions, however deserved, can lower the size of the loan you’ll qualify for.
For some types of loans, there can be upper income limits. Conventional, FHA, and VA loans have no upper limits. But with USDA loans, your income must not exceed 115% of the median income in your area.
4. Debt-to-Income Ratio
Typically, your income doesn’t matter as much as your debt to income ratio. Your DTI is calculated by dividing your total monthly debt, including your proposed house payment, by your gross monthly income, expressed as a percentage.
For example, say you pay $1,500 a month for a mortgage, $100 a month for a car loan, and $400 a month on a student loan. Your total monthly debt comes to $2,000. If you make $6,000 a month before taxes and deductions, your debt-to-income ratio is 33% ($2000 divided by $6000, multiplied by 100).
Depending on your credit score, down payment, and cash reserves, your DTI ratio may weigh heavier or lighter in the qualification process.
• Conventional Loan DTI: The maximum DTI for a conventional loan is 45%, but exceptions can be made for strong compensating factors.
• FHA DTI: FHA guidelines allow for a DTI of 43%, but higher ratios are allowed with compensating factors.
• USDA Loan DTI: The USDA usually allows a maximum DTI of 41% but may make exceptions for those with higher credit scores and stable employment.
• VA Loan DTI: VA guidelines call for a maximum DTI of 41%, but lenders set their own limits based on an applicant’s financial health.
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Lenders will want to know about any valuable assets you hold. The idea is that these assets can be converted to cash in the event you face financial hardship down the road. Assets can include cash accounts, retirement accounts, stocks and bonds, cars, boats, RVs, jewelry, artwork, and collectibles. You’ll be asked to provide proof of ownership and value, such as appraisal letters.
Not having the proper documentation in the mortgage loan process can hold things up. As noted above, lenders usually ask for:
• Tax returns from the past two years.
• Two years’ worth of W-2s or year-end pay stubs. If you are self-employed, other evidence of income.
• Child support or divorce documents.
• Bank statements.
• Statements from additional assets.
• Gift letters.
• Photo ID.
• Rental history and contact information.
7. Property Type and Purpose
Up to now, we’ve discussed mortgage qualification factors that are based on the buyer’s financial history. But lenders also consider the purpose of the property you want to buy. A “primary residence,” meaning a home that a buyer purchases with the intention of living in it, will usually qualify for a lower interest rate and better terms than a vacation home or investment property.
The type of home you purchase also makes a difference. Single-family houses secure the best rates. Other types of housing that may incur special fees include condos, co-ops, manufactured houses, log homes, mixed-use developments, and nontraditional architecture. Homes shaped like dinosaurs or flying saucers just make lenders a little nervous.
8. Mortgage Type
The type of mortgage you may want to seek as a primary-home owner will depend on your credit scores, income, the lender’s loan menu, and more. Government-backed mortgages (FHA, VA, and USDA loans) are acquired through approved lenders, and conventional home loans are issued by a bank, credit union, or other private lender.
• FHA loan: Mortgages backed by the Federal Housing Administration have lower credit requirements than conventional loans but tend to be more expensive for borrowers with good credit and a medium down payment.
• VA loan: Loans insured by the Department of Veterans Affairs are for active-duty service members, veterans, and some surviving spouses. The VA also has a Native American Direct Loan program, which allows Native Americans to buy, build, or improve a home on federal trust land.
• USDA loan: Loans backed by the U.S. Department of Agriculture are for moderate-income buyers who choose a home in a designated rural area. The USDA offers direct loans for low-income households.
Most mortgages come with a fixed interest rate, but a variable rate can be an option for some conventional loans, as can a variety of mortgage terms or lengths. The fixed-rate 30-year mortgage dominates the U.S. landscape.
One last wrinkle: There are conforming loans and nonconforming loans. By meeting loan limits, a conventional conforming loan is eligible for purchase by Fannie Mae and Freddie Mac. If it isn’t eligible, it’s a nonconforming mortgage — like the government loans or a jumbo loan.
9. Other Mortgage Qualification Considerations
When browsing for a home, you might consider loan prequalification or preapproval.
Prequalification is a simpler version of preapproval. You’ll provide basic information, which can be by phone or online, and a lender will estimate what size loan you might be approved for. No information is verified at this point.
For preapproval, you’re required to give a lender access to your financial history. After reviewing your credit, income, and assets, the lender will offer a loan up to a specific amount. It doesn’t guarantee that you’ll be approved when you formally apply, though.
Prequalification and preapproval can be great ways to dip your toe into the home-buying waters. Then you may apply with more than one lender. Comparing loan estimates can help you determine which option is best for you financially.
Do I Qualify For a Mortgage?
To help you determine how big a home loan you might qualify for, there are a variety of online mortgage calculators to help get you started:
• Home Affordability Calculator
You know there are many factors that can help or hurt your chances of getting approved for a mortgage loan. Here, we lay them all out in one place: your down payment, credit score, income, debt-to-income ratio, assets, documentation, property type and purpose, mortgage type, and prequalification or preapproval. Some of these factors can compensate for weaknesses in other areas. For instance, a lower income is less of a problem if you have plenty of valuable assets to draw on. And a high down payment can counter a middling credit score.
Home shoppers with stable finances would be smart to look into SoFi home mortgage loans with competitive fixed rates. Qualifying first-time homebuyers can put as little as3% down, and others, 5% down.
What are the four things you need to qualify for a mortgage loan?
To qualify for a mortgage loan, you’ll need a stable income, strong credit score, modest debt-to-income ratio, and documentation of your employment and assets. Believe it or not, some loan programs do not require a down payment!
What is the lowest income needed to qualify for a mortgage?
There is no minimum income required to apply for a mortgage. However, your income will determine how large a loan you’ll qualify for. Sometimes, your assets can compensate for a lower income. And there are government-backed programs, especially for low-income borrowers.
At what age do you not qualify for a mortgage?
There is no maximum age limit to qualify for a mortgage loan. In fact, lenders legally cannot deny someone a loan term based on their age. For instance, a 70-year-old can still qualify for a 30-year mortgage term.
What do banks check before giving a mortgage?
Just about everything. Banks check your credit history and score, proof of employment and income (W-2s, 1099s, tax returns), your assets (bank statements), your debts (credit card bills), and anything else that will give them a picture of your overall financial health and future prospects.
Do mortgage lenders look at your spending?
Yes, mortgage lenders may look at your bank and credit card statements for the last two years to see whether your spending habits are consistent and where your money goes.
Is everyone eligible for a mortgage?
Pretty much anyone who can afford to carry a mortgage can qualify for one. However, it’s possible that someone who earns money under the table or holds their assets in offshore accounts wouldn’t be able to document their financial qualifications to satisfy a lender.
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
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