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Today’s Minimum Mortgage Requirements

minimum mortgage requirements

Rising interest rates have people wondering if now might be a good time to buy a home. The next question people usually consider is what they’ll need to qualify for a mortgage.

Although credit standards have relaxed somewhat since the peak of the financial crisis that began a decade ago, there are still minimum standards that homeowners 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 percent of the mortgage. Because of the lower down payment requirements with an FHA mortgage, this option is good for first-time homebuyers who may not have sufficient savings to make the typical 20 percent down payment on a home purchase.

These are the current minimum requirements for an FHA-approved mortgage:

  • Down payment: 3.5 percent down payment with a credit score of at least 580. A 10 percent down payment with a credit score between 500 and 579
  • Debt-to-income ratio: 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 percent and the back-end is 43 percent. 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.
  • Residence: The home must be the borrower’s primary residence for at least the first year.
  • Employment: Borrower must have steady income and proof of employment.
  • Mortgage insurance: Mortgage insurance is required regardless of down payment amount — both upfront and ongoing insurance. The upfront fee is 1.75 percent of the loan balance due at closing; the ongoing rate is 0.85 percent of the loan’s value annually.

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Conventional loan requirements

A conventional 30-year or 15-year mortgage has slightly stricter requirements than an FHA loan. But it’s also more flexible in other ways.

Down payment: Some lenders may allow you to make a down payment of as little as 3 percent and qualify for a conventional mortgage, although mortgage insurance will be required.

Mortgage insurance: Unlike an FHA home loan, with a conventional mortgage, you won’t need to carry and pay for mortgage insurance if you can make at least a 20 percent down payment 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.

Credit score: The minimum score for a conventional mortgage is 620, although some lenders, especially smaller financing companies, may require a minimum score of 640. Keep in mind that higher (better) credit scores will entitle the borrower to a more favorable interest rate on the mortgage.  

Employment: Proof of steady income required.

Debt-to-income ratio: 43 percent, but lenders may go up to 50 percent in select cases.

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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.

COE: 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.

Down payment: No down payment required.

Mortgage insurance: VA loans don’t come with PMI fees, however, there is a funding fee associated, which is charged at closing.

Credit score: The VA’s credit score requirements usually have a minimum cutoff of 620, in line with conventional mortgages.

Income: There’s no minimum income threshold to meet, although applicants must still be able to show proof of steady income.

Debt-to-income ratio: To qualify for a mortgage through the Veterans Administration, you’ll need to show a DTI ratio no higher than 41 percent.  

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USDA 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 program provides a 90% loan note guarantee to USDA-approved lenders. 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 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 are different for each city and county in every state and also vary by 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 as well as 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.

Debt-to-income ratio: The standard DTI ratios for the USDA home loan are 29 percent/41 percent of the applicant’s gross monthly income. The maximum allowable DTI on a USDA loan is 32 percent/44 percent of the gross monthly income. All applicants on the loan must also have a credit score of at least 680. The USDA allows those higher ratios under some circumstances that 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

HomeReady®: The government-sponsored agency Fannie Mae offers the HomeReady® mortgage program.

Income: This is an option for prospective homebuyers who have moderate to low income and limited cash for a down payment

Down payment: 3%

Credit score: 620 minimum

Credit history: 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 like utilities that do not appear on credit reports.
Debt to income ratio: 43 percent

HomePossible®: Freddie Mac manages the HomePossible® mortgage program.

Income: 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.

Credit: 620 minimum.

Down payment: 3%

Debt to income ratio: 43 percent

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
  • Pay stubs for the last 90 days
  • 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
  • Bonuses
  • Pension statements
  • Securities documents such as stocks, bonds, life insurance policies
  • Social Security or disability income, if any
  • Some lenders may also request written verification of your salary and position, printed on your employer’s company letterhead

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 houses outside your price range. A mortgage preapproval simply means a lender has looked into your credit history and current finances, and is tentatively prepared to loan money to you for a house.

To get a prequalification letter from a lender, you’ll need to provide:

  • Your identification, including Social Security Number
  • The two most recent, consecutive months of bank statements
  • Employment verification; either a month of pay stubs or W-2s going back two years (1099 forms if you’re self-employed)

Lenders are also going to 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 by getting preapproved by several lenders. They will only count as one hard inquiry if you do them within a short time frame (15-45 days typically).

Buying a home is a major financial commitment and for many people, the culmination of a lifelong dream. LendingTree 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 and getting your financial documents together, you’ve already taken the first step.

 

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