Qualifying for a mortgage is an essential step in the homebuying process. It requires a thorough evaluation of your financial situation, including your income, credit score, and debt-to-income ratio. The specific details can vary depending on the type of mortgage you’re seeking, but here seven key factors that lenders typically consider when evaluating your eligibility for a mortgage.
Your credit score plays a major role in getting approved for a mortgage. Here are the minimum scores by loan type:
Keep in mind that the better your credit score, the better rates you’ll be offered. Currently, 780 is the benchmark for best available rates, which is up from 740 in previous years.
Lenders are also allowed to consider an “average median score” when more than one person is on the loan. This means that a score below 620 is no longer a bar to getting a mortgage, as long as the other person’s score is high enough to make up for it.
Down payment funds typically come from your own savings or as a gift, and minimum percentages also vary across lender types. Convention loans require at least a 3% down payment, while FHA loans require a minimum of 3.5%. VA and USDA mortgages do not require a minimum down payment.
It’s important to note that if you’re taking out a Fannie Mae mortgage, down payments between 5 to 20% now charge higher rates for borrowers with scores between 680 and 779. If you make less than a 5% down payment in this credit score range, your rates may be lower.
To make sure that you’re a “good risk,” lenders will request proof of steady income and bank statements. This usually means documentation that you’ve been employed for two or more years of income from wages, bonuses, commissions, overtime, and other sources.
For sole proprietors and contractors, lenders usually ask for two years’ worth of your federal tax returns (both personal and business). Your lender may be able to electronically verify your returns by contacting the IRS.
Typically, lenders will require that your monthly mortgage payment not exceed 28% to 33% of your gross monthly income. But some mortgage types, like USDA loans, actually have maximum income limits to qualify.
Next, lenders will consider how much debt you have, relative to the income you’re bringing in. This includes student loans, monthly credit card debt, personal loans, auto loans, and more.
Your debt-to-income ratio (DTI) is calculated by dividing your total debt by your gross monthly income. Generally, conventional lenders look for a ratio of 45% or less, but they may accept up to 50% for people with higher credit scores and cash reserves.
Keep in mind that a higher DTI ratio can affect what kind of conventional mortgage interest rates you get. If you can keep your ratio below 40%, you’re more likely to get good rates, especially on conventional mortgages.
Mortgage insurance requirements also vary by loan type. While not every mortgage is available to every type of borrower, you’ll still want to keep in mind the insurance requirements for any type of loan you’re eligible for. Here’s a look at what to expect:
Each type of mortgage has its own home appraisal requirements — lenders want to make sure that a property is actually worth what you’re paying for it, in case they have to foreclose. However, certain exceptions may apply.
For example, conventional mortgage lenders will let you skip an appraisal with a 20% down payment and a property inspection waiver. FHA loans, on the other hand, always require an appraisal and have stricter standards. VA mortgages require VA-approved appraisals through their own system, and USDA almost always requires them.
Finally, homebuyer education is mandatory for certain types of FHA loans. If you’re planning to apply for a HomeReady or Home Possible loan, you’ll need to complete a homebuyer education course. Other mortgage types may not require educational courses, but it never hurts to be an informed borrower.
Whichever type of mortgage you apply for, understanding the qualifications for a mortgage can make the process go a lot faster. Not only can you prepare the documentation ahead of time, you’ll have a better idea of which programs will approve your application and which might be out of reach — or less beneficial to your circumstances.
When you buy a home with Orchard, you can get no-fee financing with Orchard Mortgage. Learn more about how Orchard works.
The four things you need to qualify for a mortgage are a good credit score, a stable source of income, a manageable debt-to-income ratio, and a sufficient down payment.
The percentage of income you need to qualify for a loan varies depending on several factors, including your debt-to-income ratio, credit score, and the type of mortgage you are applying for. Generally, lenders prefer that your monthly mortgage payment not exceed 28% to 33% of your gross monthly income.
Most lenders accept income from a variety of sources, including regular employment income, self-employment income, rental income, and investment income. Lenders will evaluate your income and employment history to ensure that you have a stable source of income.
The documents required for a mortgage application vary depending on the lender and the type of mortgage you are applying for. However, typically, you will need to provide proof of income, employment history, credit history, and assets. You may also need to provide other documents such as tax returns, bank statements, and proof of identity.
There are several steps you can take to improve your eligibility for a mortgage, such as improving your credit score, reducing your debt-to-income ratio, saving for a larger down payment, and ensuring that you have a stable source of income. It is important to consult with a mortgage lender or financial advisor to assess your financial situation and determine what steps you can take to improve your eligibility for a mortgage.
When you list with Orchard, we’ll get your home show-ready and make repairs to increase your home’s value at no upfront cost.
Orchard guarantees your home will sell, so you can buy your next one worry-free.
We provide peace of mind that your home will sell, plus list your home on the market to maximize your earnings.
Use our home sale calculator to estimate your net proceeds.
Our Home Advisors are experienced local agents who know how to sell for top dollar and help win your dream home.
All Orchard Home Advisors are experienced agents who know your local market inside and out. Request a consult today.
Did you know cash offers are 4x more likely to be chosen by a seller? Let us help you make one on your next home.
Get the most accurate free home valuation — in minutes
Orchard Home Loans shops the market to find your best rates.
A cash offer is 4x more likely to be chosen by a seller. Get qualified today.
Make a cash offer now, and Orchard will sell your old home after you move.
Tell us your must-haves to see personalized home recommendations that meet your criteria.