How to qualify for a mortgage in 2024 — 7 things to know

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.

1. Minimum credit score requirements

Your credit score plays a major role in getting approved for a mortgage. Here are the minimum scores by loan type:

• Conventional: Conventional mortgages typically require a 620 credit score, at minimum.
• FHA: FHA credit scores depend on how much of a down payment you’re making. At 3.5% down, your credit score must be 580 or higher. With 10% down, it drops to 500.
• VA: VA loans have no minimum credit score, but 620 is usually the lender’s standard.
• USDA: USDA loans lack a minimum credit score, but 640 is the lender’s usual standard.

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.

2. Down payment requirements 

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. 

3. Employment and income requirements

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. 

Learn how to get a mortgage when you're self-employed

4. Debt-to-income ratio requirements

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. 

5. Mortgage insurance requirements

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:

• Conventional home loan: A conventional mortgage with less than a 20% down payment needs private mortgage insurance or PMI. This is to minimize the risk to lenders if you default on the loan. The higher your credit score and down payment, the lower the rate: they’re typically between 0.14% and 2.33%. This is usually paid as part of the monthly payment, although it can be paid at closing.
• FHA loan: FHA mortgages require two types of FHA mortgage insurance: an upfront premium (1.75% of the loan amount), which is usually included in the mortgage financing. The second is an annual mortgage insurance premium, which ranges from 0.15% to 0.75% and is added to your monthly payment.
• VA loan: VA loans do not require mortgage insurance, but you’ll pay a “funding fee” between 1.40% and 3.60%. This depends on whether you’ve used VA benefits before and how big your down payment is.
• USDA home loan: These loans also do not require mortgage insurance. Instead, you’ll pay 1% of your total loan amount plus 0.35% in annual fees.

6. Home appraisal requirements

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.

7. Homebuyer education requirements

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.

Get qualified and get the home of your dreams

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.

FAQs

Q: What are the four things you need to qualify for a mortgage?

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.

Q: How much income do you need to qualify for a mortgage?

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.

Q: What kind of income is acceptable to qualify for a mortgage?

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.

Q: What documents do I need to provide to qualify for a mortgage?

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.

Q: What steps can I take to improve my eligibility for a mortgage?

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.