How to qualify for a mortgage

You might think buying a home isn’t a feasible goal because you don’t have an 800 credit score or thousands of dollars in the bank. However, it’s possible to be approved for a mortgage loan with less-than-excellent credit — and you don’t even have to drain your savings to offer a down payment.

Owning a home might be a real possibility, even if you worry you wouldn’t qualify. If homeownership is a dream of yours, start by investigating your loan options.

What you need to qualify for a mortgage

Though the basics are often similar, mortgage requirements differ depending on the type of loan. Mortgage lenders typically consider a borrower’s credit score, debt-to-income ratio, ability to make a down payment and other factors.

Conventional loans

Conventional mortgage loans are home loans from private lenders, like banks or credit unions, that are not backed by government agencies. This means they tend to have stricter lending requirements — though these requirements can vary by lender.

• Credit score: Because conventional loans have tighter loan requirements, the minimum credit score to qualify for one is usually at least 620. Your credit score can also affect the interest rate you’ll pay on the loan. In general, the higher your credit score, the lower the interest rate.
• Debt-to-income ratio: Lenders use the DTI ratio to evaluate applicants for all loan products, especially mortgage loans. It’s calculated by taking the total of all regular debt payments (car loans, student loans, etc.) and dividing that by your gross monthly income (income before taxes).

  For the most part, banks want your DTI to be less than 36%, though the exact percentage can vary by lender. In other words, if your DTI is higher than 36%, you won’t necessarily be denied a loan. It could mean that other requirements will come into play, like a higher down payment or credit score.

• Down payment: Your down payment is the amount of cash you put down upfront, based on a percentage of the home’s sales price. The minimum down payment for conventional loans is typically 3%. So, if you plan to purchase a $300,000 house, you’ll need to offer $9,000 cash as a down payment in order to obtain a conventional mortgage. Borrowers can avoid paying mortgage insurance premiums if they offer at least a 20% down payment.
• Loan-to-value ratio: The LTV ratio reflects the portion of the home’s value that is not covered by a down payment. It’s calculated by dividing the mortgage loan amount by the home’s appraised value. Lenders typically look for an LTV of 80% or lower, which means you’re financing 80% or less of the home’s value. Increasing your down payment can help decrease the LTV.

Jumbo loans

Jumbo loans, also called “nonconforming loans,” are mortgages that exceed the conforming loan limits. In 2022, the conforming loan limit in most areas in the U.S. is $647,200. Buyers seek jumbo loans when they want to purchase higher-priced homes, such as luxury properties.

These loans carry a greater default risk, so the interest rates are typically higher than those of conforming loans. The loan requirements in general are stricter.

• Credit score: Jumbo loans are considered riskier for lenders, so the credit score requirements are higher than for conventional loans. Most financial institutions require a credit score of at least 680 for a jumbo loan, although 740 is typical for a jumbo loan borrower. Usually, the higher the loan amount, the higher the credit score required.
• Debt-to-income ratio: As with conventional loans, jumbo loan lenders like to see a DTI ratio of 36% or lower. However, some lenders will allow a higher DTI ratio if you have a good credit score or large down payment.
• Down payment: Down payment requirements for jumbo loans are also higher than for conventional loans — typically between 10% and 15% of the home’s appraised value. Also, like with conventional loans, borrowers can avoid paying mortgage insurance premiums if they put down at least 20%.
• Loan-to-value ratio: Generally, an LTV of 80% on a jumbo loan is ideal, but lenders might allow an even higher percentage, depending on the down payment amount.

FHA loans

FHA loans are backed by the federal government through the Federal Housing Administration (FHA) and are offered by FHA-approved lenders. These loans are popular with first-time homebuyers because they tend to have lower down payment and credit score requirements.

• Credit score: The minimum credit score for an FHA loan is 500, which is significantly lower than for a conventional loan. However, some FHA lenders require higher scores, usually ranging from 500 to 580.
• Debt-to-income ratio: Your DTI ratio should be 43% or less if you’re applying for an FHA loan, though this requirement can vary depending on your credit score.
• Down payment: The down payment requirement is tied to your credit score. If you have a score of 580 or higher, you only have to put down 3.5%. If your credit score is between 500 and 579, the down payment requirement jumps to 10%.
• Loan-to-value ratio: Because the down payment requirements are lower with FHA loans, the LTV ratio can be higher.

USDA loans

USDA loans are backed by the federal government through the U.S. Department of Agriculture (USDA). USDA loans are used for purchasing or refinancing a house in rural areas. This program was created to encourage homeownership for low- to moderate-income earners.

• Credit score: While the USDA doesn’t set a fixed credit score requirement, lenders who offer USDA loans may require at least a 640 score. Like with other loan options, if your credit score falls below a minimum, the lender may require a higher down payment.
• Debt-to-income ratio: Typically, the USDA sets the maximum DTI ratio at 41%, but borrowers with higher credit scores and the ability to prove stable employment could have some flexibility with this cap.
• Down payment: USDA loans generally do not have any down payment requirements.
• Loan-to-value ratio: Because there’s no down payment requirement, you can finance the full sales price.

VA loans

VA loans are mortgage loans available to active-duty military personnel, veteran military service members and surviving spouses. These loans are insured by the U.S. Department of Veterans Affairs. To apply, you’ll need to show a VA Certificate of Eligibility.

• Credit score: VA loans do not have a set credit score requirement. However, borrowers with scores higher than 620 have better chances of being approved for a VA loan.
• Debt-to-income ratio: The VA doesn’t set a maximum DTI ratio, but most lenders use the benchmark of 41% to determine eligibility.
• Down payment: There are no down payment requirements, as long as the home’s sales price doesn’t exceed the appraised value.
• Loan-to-value ratio: As with USDA loans, VA loans do not require a down payment. You can finance the home's full purchase price.

Other factors

There are other factors that affect mortgage loan qualification, like proof of employment and assets. Lenders will ask for documentation that shows you’re currently employed and that you earn a certain income. They may request pay stubs, tax returns from the most recent two years and W-2s. Lenders may also call your employer to verify your salary, while self-employed individuals must provide tax returns.

Lenders will also want proof of assets, which show that you have the funds available to cover the down payment and the closing costs, plus a cash reserve. You can show proof of assets by providing account statements from your financial institution. These statements can also include any investment accounts.

In addition to proof of income and assets, you’ll need to show proof of your identity. Lenders will ask for your current driver’s license to copy and include in your loan application file. You’ll also need to provide your Social Security number and sign a document allowing lenders to pull your credit report.

If you’re applying for a mortgage with a spouse, they’ll need to provide the same documentation.

Bottom line: Can you qualify for a home loan?

If you’re planning to buy a home, the mortgage products available to you will depend largely on your credit score, your ability to provide a down payment and your debt-to-income ratio. Your options also vary depending on whether you are a veteran or a buyer in a rural area.

For borrowers with excellent credit and the ability to offer a significant down payment, conventional loans may offer lower interest rates. However, for first-time homebuyers without much cash reserved, FHA loans may be enticing because they don’t require a big down payment or a high credit score.

If you’re a veteran, VA loans are a great option — unlike conventional loans, they don’t have a mortgage insurance requirement, even if you put down less than 20%. USDA loans also provide an affordable option for many, though these are only available in specific rural areas.

Buying a house is a huge move, and it’s smart to get in touch with a trusted loan officer at your financial institution who can help evaluate your situation to find which loan options you’re eligible for.