If you’re looking to buy a house in 2021, one of the first
steps is figuring out whether you'll qualify for a mortgage.
There are several different types of mortgage loans, and by
knowing the requirements for each, you’ll be able to choose the loan type best
suited for you.
In this guide, we’ll cover the minimum mortgage requirements
for the four most common types of home loans. Then, we’ll look at some tips for
meeting those minimum standards.
Minimum mortgage requirements
Most mortgage requirements fall into seven categories.
Before we dive into the specifics for each loan type, let’s make sure we
understand the importance of each of the typical requirement categories.
Credit score: In most cases, the higher your credit
score, the less risky you are in the eyes of lenders (and the more favorable
terms you’ll get). If you're not sure where your credit stands, it's easy today
to check your credit score for free.
Down payment: Some types of loans accept a low — or
no — down payment, but they usually involve expensive insurance.
Mortgage insurance: If you make a low down payment,
you’ll normally be required to pay for some kind of mortgage insurance. This is
to protect the lender in case you default on your loan. The type and amount of
mortgage insurance you pay will depend on your loan.
Debt-to-income ratio (DTI): Your DTI is your total
monthly debts — student loans, auto loans, credit card debt, etc. — divided by
your gross (pretax) income. A high DTI means you have less money available at
the end of the month to pay off your debt. This makes you riskier to lenders.
Income: Some special loan programs are available only
to low- and moderate- earners.
Employment: To show you’re capable of paying off your
loan, most lenders will require evidence of a steady income. Applying for a
loan might provide the nudge you need to look for a better job.
Occupancy: Some loans require you to use the home as
your primary residence. Others are more flexible in terms of how the home is
used (e.g., vacation home, rental property, etc.)
Remember, these are just the main types of requirements.
There may be additional requirements depending on the loan type and the lender
you choose to work with.
Now, let’s look at the specific requirements for different
types of loans.
Conventional loan requirements
Conventional loans are not backed by government agencies and
are handled directly through private lenders.
The lending standards for conventional mortgages are
dictated by Fannie Mae and Freddie Mac, government-sponsored companies that buy
most U.S. home loans from lenders and bundle them into investments called
Conventional loans tend to have more stringent requirements
than government-insured loans, making them more popular among those with strong
credit scores and limited debt.
Credit score: To be eligible for conventional loans,
you’ll need a credit score of at least 620. Normally, the higher your score,
the lower the interest rate you can secure. High credit scores can help
compensate if you have limited income, a high DTI, or a low down payment.
Down payment: Most lenders will require a down
payment of 5% to 20% for a conventional loan. But some may accept as little as
Mortgage insurance: If your down payment is less than
20%, you’ll likely be required to purchase private mortgage insurance (PMI)
until you build 20% equity in the property.
Debt-to-income ratio: Most lenders will want your DTI
to be below 45%. However, they may make an exception if you have a high credit
score, cash reserves or other ways to prove you’re capable of repaying the
Income: There are no income limits for conventional
loans (apart from the HomeReady and Home Possible programs described below).
Employment: Lenders will review your employment
history from the past two years to make sure you have a steady income. If
you’re a self-employed borrower, you’ll need to prove steady income with
Occupancy: Conventional loans can be used to purchase
a primary residence, vacation home, or rental property.
Special conventional loan programs
If your income is less than or equal to 100% of your area's
median income, you may qualify for a HomeReady or Home Possible loan. These
conventional loans have some extra perks, such as:
Alternative options to prove creditworthiness if you have no
Ability to add 30% of the income of another person living in
your house to your total monthly income.
An option to make a sweat equity down payment, meaning a
payment made with house repair labor instead of cash
Unlike normal conventional loans, these special programs can
be used only for a property that will serve as your primary residence.
FHA loan requirements
FHA loans, insured by the Federal Housing Administration,
are made by FHA-approved lenders. The government's backing enables lenders to
lend money to those who normally would be too risky. Because of this, it can be
a great mortgage option if you have a low credit score.
FHA loans are popular with first-time homebuyers, but you
don't have to be a first-timer to land one.
Also, unlike with conventional loans, there are limits to
how much you can borrow with an FHA loan. These limits vary by location.
Credit score: The minimum credit score for an FHA
mortgage is 500, but if your score is below 580, you’ll have to make a larger
Down payment: If your credit score is between 500 and
579, you’ll need a minimum down payment of 10%. If your score is 580 or above,
you only have to put down 3.5%.
Mortgage insurance: You must pay upfront and monthly
FHA mortgage insurance premiums (MIPs) on all FHA loans. With a down payment of
10% or more, you can remove MIP after 11 years. Otherwise, you’ll have to pay
MIP annually for the entire length of your loan.
Debt-to-income ratio: You’ll want to get your DTI
below 43% before applying for an FHA loan.
Income: There are no income limits for FHA loans.
Employment: As with any loan, FHA lenders will want
to see proof of steady employment.
Occupancy: FHA loans can only be used for your
primary residence. However, you are only required to use it as your primary
residence for one year.
VA loan requirements
VA mortgages are available to eligible active military
personnel, veterans and some military widows and widowers. Since VA loans are
backed — or even directly funded — by the U.S. Department of Veterans Affairs
(VA), the mortgage qualifications are less stringent.
The loans also tend to offer better terms and interest rates
than conventional mortgages from private lenders.
To qualify, you’ll need to obtain a VA loan certificate of
Credit score: VA direct loans have no credit score
requirement, while VA-backed loans (offered by private lenders) may have
varying credit score requirements.
Down payment: You are not required to make a down
payment for a VA loan as long as the sale price doesn’t exceed the home’s
Mortgage insurance: Mortgage insurance is not
required for VA loans. However, you will need to pay a one-time VA funding fee.
This fee is calculated as a percentage of your loan amount.
The percentage depends on several factors including your
loan type, the number of VA loans you’ve taken out, and your down payment
amount. If you have a service-related disability, you may be exempt from the
Debt-to-income ratio: There is no set maximum DTI
ratio for VA loans, but if yours is greater than 41%, you’ll need to make up
for it with a high residual income, high credit score or other compensating
Income: There are no income requirements for VA
loans, but you do need to demonstrate proof of your ability to repay the loan.
Employment: As with other loan types, you’ll need to
show proof of steady employment. However, if you were recently discharged,
lenders tend to be more flexible.
Occupancy: VA loans can be used only on a primary
USDA loan requirements
USDA loans are backed by the U.S. Department of Agriculture
and are designed to help low- and moderate-income earners secure mortgages for
In this case, the definition of “rural” is quite flexible.
This map shows which areas qualify for a USDA loan.
Credit score: There is no minimum credit score, but
scores below 640 do not qualify for auto-approval and will be subject to manual
Down payment: USDA loans can be 100% financed, so
they require no down payment.
Mortgage insurance: Mortgage insurance is not
required, but you will be charged a 1% upfront fee (called a guarantee fee) as
well as a 0.35% annual fee.
Debt-to-income ratio: USDA loans look at two
different types of DTI: front-end and back-end.
The maximum front-end DTI is 29% — this is the percentage of
your gross monthly income that goes towards your monthly housing debt.
The maximum back-end DTI is 41% — this is the percentage of
your gross monthly income that goes towards all monthly debt. As with the other
loan types on this list, you may be able to offset a higher DTI if you have a
high credit score, stable job history, or significant cash reserves.
Income: To qualify for a USDA loan, your income must
fall into the very low-, low- or moderate-income ranges. These ranges vary by
location and can be found using this map. Your income range will determine
whether you qualify for the Direct Program or the Guaranteed Program.
Direct Program loans are funded directly by the USDA (and
may include additional assistance), while Guaranteed Program mortgages are
simply insured by the USDA.
Employment: Most lenders will want to see two years
of work history to confirm that you have a steady income.
Occupancy: USDA loans must be used on a primary
Qualifying for a home loan
Learning about the requirements to qualify for a home loan
is only the first step.
From there, you'll need to actually meet those requirements.
Here are some steps you can take to help you increase your
odds of qualifying for a mortgage.
Your credit score is something you’ll want to start working
on far in advance. Building your credit score doesn’t happen overnight, so if
you wait until the last second, you may run into problems.
The first steps to building your credit score are checking
your current score and learning the factors that influence it the most.
If you are planning to apply for loan programs designed for
low-income families, make sure you are familiar with the eligible income ranges
in your area.
If the loan you’re interested in has no income limits, try
to earn as much as possible for the months (and years) leading up to your loan
application. This will help show lenders you're capable of repaying a home
Since most lenders are going to look at your last two years
of employment, this is also something you’ll want to address far in advance.
Remember, lenders are mainly concerned with your ability to
generate a steady, reliable income. So, if you lose your job or work is slow,
find ways to supplement your income.
In this guide, we focused on the maximum limits for DTI. But
if you want the highest odds of qualifying for a mortgage, you’ll want to cut
your DTI down as much as possible.
There are two ways to do this:
Increase your monthly income.
Decrease your monthly debts.
If possible, try to do both.
Saving for a down payment probably isn’t your definition of
fun — especially now that you’re aware of several low- and no-down-payment loan
options. It may be tempting to put down as little as possible, but a low down
payment will weaken your mortgage application and cost you more in the long
Do your future self a favor and start squirreling away money
for a down payment today.
To qualify for a home loan at one of today's historically
low mortgage rates, lenders require mountains of paperwork. This includes
documents verifying your income, assets, debts, credit and other aspects of
your financial history. You’ll also need to gather paperwork pertaining to the
property you’d like to buy.
To speed up the process, it’s a good idea to make a
checklist and start gathering your documents well in advance.
Click here for the