Buying a home is the largest purchase many of us will ever make—which means taking out a mortgage could be the most money you ever ask for at a single time. In fact, the average amount of a mortgage in the U.S. is $354,500 , money you won’t get just by asking nicely.
Qualifying for a mortgage can seem intimidating, but the more you know and prepare for up front, the less stress and confusion you might encounter.
Typically, the better your credit and income, the more mortgage options you will have available to you and with potentially better terms. Loan programs can vary with regard to the amount of down payment needed, the minimum credit score, and more. Variations occur from program to program and lender to lender.
The mortgage qualification process can be complicated, so if you’re serious about putting in an offer on that home, you might want to know what it takes to secure a mortgage.
One of the first things to identify is—what types of mortgage programs fit your needs? Because loan programs and lender offerings can vary, here are some tips for how you might best choose and qualify for a mortgage.
Types of Mortgages
Before we dive deep into what lenders look for in the qualification process, let’s take a step back and outline the types of mortgages you might be looking to secure. The most common types of loans are conventional, government-insured such as FHA, and special program loans such as VA or USDA.
Depending on your loan scenario, you may end up using one or multiple loans. The main difference between each is the size and whether the loan is associated with a government program. However, a loan program can be chosen for other reasons.
• Conventional loans are the most common type of home loan. These loans aren’t part of a government-insured loan program. According to the Consumer Financial Protection Bureau (CFPB) , conventional loans “typically cost less than FHA loans but can be more difficult to get.”
• FHA loans come from private lenders but are insured and regulated by the Federal Housing Administration. FHA Loans typically come with lower down payment options and allow for lower credit scores.
• Special program loans are typically more affordable than the above options, but they may have special eligibility criteria around qualifying. Popular special loan programs include VA, USDA, and state or local programs.
Each loan can have different qualifications, as well as requirements for down payments, loan amounts, etc. Comparing loan estimates could help you determine what option is best for you financially.
Down Payment Guidelines
Your down payment can vary based on things like the mortgage program you qualify for. If you’ve already researched what mortgage you’ll apply for, here are some guidelines for general down payments required on each.
When it comes to conventional loans, 20% has always been the traditional payment. But this tradition has changed of late—in 2014, Fannie Mae announced its 3% down payment program, and the National Association of Realtors reported that for first time homebuyers, the average conventional loan down payment hovered around 7%.
However, paying less than 20% on a conventional loan often means you’ll likely need to pay mortgage insurance on the loan. With SoFi, you can put as little as 10% down on a loan up to $3 million.
One catch with your FHA loan could be the FHA mortgage limits and/or your credit score. Generally, if your credit score is at least 580, you may qualify for as little as 3.5% down payment. Below 580? Generally, at least 10% down is required.
Special Program Loans
With some special program loans, a down payment isn’t required. VA, USDA, and some state and local programs don’t require a down payment on the loan if you and the property meet qualification requirements.
Depending on eligibility criteria and program features, you may choose a program that offers down payment assistance and more.
These down payment assistance programs (DAP) features can vary by state and city. One special program example is the California Housing Down Payment Assistance Programs (CalHFA) .
These special programs can have limitations around things like income, location, sales price, loan amounts, etc. Check program details for qualifying criteria.
Credit Score Guidelines
A credit score can distill your financial history down to a single number to prove your worthiness to mortgage lenders. Credit scores can come in many shapes in sizes, but your lender will most likely use one of your 3 FICO®️ Scores from the 3 major credit bureaus to determine if you qualify. A credit score may take into account things like:
• If you make payments on time.
• How much can you borrow against how much you could be borrowing.
• How long you’ve had accounts open, and how long you’ve been paying them. The longer you hold accounts, the better.
• What kind of credit you have, whether it be a loan or a credit card.
• How often you’ve applied for credit, like taking out a new loan or opening a credit card.
Your score can range from 300 to 850 with this scale :
• Exceptional: 800–850
• Very Good: 740–799
• Good: 670–739
• Fair: 580–669
• Very Poor: 300–579
The better your score, the better you’re likely managing your credit, making it easier for a mortgage lender to give you a loan.
The FICO Scores required to qualify for a mortgage vary depending upon the loan program.
However, in some cases, you don’t need a FICO Score to qualify for a home loan. Services like Fannie Mae’s no credit score program or government loan programs allow for a credit profile to be built based on other forms of credit.
This includes rent payments, insurance, mobile, cable, utilities, and more. These “non-traditional credit programs” can give a lender an idea of your credit history. But using them might require you to make a larger down payment on your home.
Depending on what type of lender and loan program you’re aiming to qualify for, your credit score might have to hit a different minimum, Check with your lender once you choose a program to confirm what the minimum credit score requirements are.
It’s not your pre-tax income that matters as much as your debt to income (DTI) ratio. For the most part, your DTI will be calculated by dividing your total ongoing or monthly debt, including your new proposed housing payment, by your gross income each month.
However, this figure can be calculated differently depending on whether you are self-employed or a W-2 wage earner.
Lenders might have different DTI requirements for different loan programs. These programs can vary depending on things like a FICO Score and the size, purpose, and type of loan. DTIs can even vary depending on the type of property.
Outside Fannie Mae and Freddie Mac conventional loans, qualifying mortgages for jumbo loans generally have a 43% DTI maximum—however, the maximum allowable DTI ratio for a conventional mortgage with automated approval is 50%.
Depending on your credit score and size of down payment, your DTI ratio may weigh heavier or lighter in the qualification process.
Required Mortgage Documents
Your down payment, credit score, and DTI ratio might be on the up and up, but not having the proper documentation when applying for your mortgage could hold things up considerably.
You might want to make sure you have the proper paperwork and documentation tracked down before applying for your loan. It could save you time when the pressure’s on. Although, with applicant’s permission, SoFi and other lenders can request most income and asset information directly from the source if you are unable to locate certain documents.
In order to verify assets and/or a steady source of ongoing income, here are some of the documents your mortgage lender might ask for:
• Tax returns – For your application, you want to have your federal tax returns from the past two years prepared.
• Proof of income – If you are employed full time, your lender will likely want to see your previous two years’ W-2s or year-end pay stubs. If you are self-employed, your lender will request evidence of income based on the type of self-employment, such as sole proprietor, partnership, or corporation. Freelancers will likely need to share 1099 forms, as well as a history of bank statements to show a steady ongoing source of income.
• Child support or divorce documents – If you have additional income such as child support or alimony, you might need to provide proof of this income through a court-approved divorce decree and most-recent bank statements.
• Bank statements – Bank statements can serve to verify the validity of your assets and income. For instance, if you are a contractor and do not receive pay stubs, a lender may ask for several months or simply your most recent bank statement to prove receipt of your income.
• Additional assets – If you have a diverse set of assets being used for the transaction, lenders will likely ask for monthly or quarterly statements from them. This includes retirement accounts, investment accounts, and life insurance.
• Gift letter – You might be relying on help from friends or family to make the down payment on your home. In that case, the lender might ask for a gift letter, clarifying that the money being given is not a loan and no repayment is expected.
• Proof of gift deposit – In addition to a gift letter, you might need to verify that the funds are in your account.
• Explanation of credit history – If your credit history is less than stellar, you might consider providing documentation as to why. For example, if large, unexpected medical bills or a layoff tanked your credit score, you could include medical bills or your formal dismissal letter.
• ID – You might want to double-check that you have a valid photo ID on hand to prove you are the person filing for the mortgage.
• Rental history and contact information – If it’s your first time buying a home, lenders might ask about your rental history. They may want your landlord’s contact information to send a verification of rent (VOR) that proves you paid your rent on time. If this is not an option, they could also ask for copies of canceled rent checks. If this is the case, you might consider reaching out to your landlord to give them a heads up that they’ll be hearing from your lender.
Paperwork and documentation might be the last thing on your mind as you zero in on purchasing a home. But if you don’t have it, or submit it incorrectly, it could cause delays in the mortgage approval process.
If you’re still browsing for a home to put an offer on, you might consider loan pre-qualification or pre-approval.
Pre-qualification, often the first step to get a loan, is a simpler version of pre-approval. You’ll fill out some basic information, and a lender can ballpark what size loan you might be approved for. No information is verified at this point, so this estimate is not a guarantee to lend.
Pre-approval can also give you an idea of how large of a loan you’d qualify for. In this process, you’re required to give a lender access to your financial history.
However, it doesn’t guarantee that you’ll be fully approved when you start the formal loan application process. Pre-approval is the first step in loan approval where a lender reviews your credit, income, and assets for approval.
This can be a useful tool when submitting an offer on a home. It lets the buyer know you’re serious about the offer and are more likely to close escrow on time because the first part of the loan approval is complete pending finding an eligible property.
Pre-approval or pre-qualification can be great ways to dip your toe into the home-buying waters without getting bogged down with paperwork and process. Both processes are relatively simple and can quickly give you an idea of what you might be able to afford.
Borrowing a mortgage is a major financial decision. Even so, there are options available to you even after you’ve taken out a mortgage. In some cases, borrowers may find that refinancing their mortgage can lead them to a lower interest rate or more favorable terms. While this isn’t always right for everyone, it could be worth considering.
If you decide that refinancing your mortgage is a step you’d like to take, consider SoFi. You can get a hassle-free quote in just a few minutes and there are no hidden fees.
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