It’s good to know how much you can afford to borrow even before you start house-hunting to avoid accumulating unmanageable mortgage debt. By planning ahead and learning more about mortgage requirements, you’ll be able to save time and ensure you have financing in place when you place an offer on a property. Knowing how banks and mortgage lenders determine individual eligibility can make the entire process as stress-free as possible.

What Are Mortgage Requirements?

Mortgage requirements refer to the minimum eligibility criteria that you must meet for a lender to approve your mortgage application. Depending on the type of mortgage you’re applying for, lenders will have minimum requirements for debt-to-income ratio, credit score, income, and down payment.

A mortgage pre-qualification can help you estimate how much house you can afford. You can use a mortgage calculator to determine how much you qualify for. However, a mortgage pre-approval is even more useful. A pre-approval is usually valid for up to 90 days, and it means that the lender has verified the borrower’s assets, employment, and debts and has approved a loan amount.  While 90 days is the usual maximum length of time that a pre-approval is good for, some lenders may issue pre-approvals for 60 days, or even just 30 days, so it is usually best to get pre-approved just before you plan to go shopping for your new home. 

4 Mortgage Requirements You Must Meet

Major lenders look at various factors such as property type, assets, credit score, debt, and income to determine whether you’re eligible for a mortgage loan.  

1. Credit Score

You’ll need a minimum FICO score of 620 for most types of mortgages. If your credit score is lower than 620, you should consider a Department of Veterans Affairs (VA) loan or a Federal Housing Administration (FHA) loan.

If you have bad credit and are worried that you may not qualify for a loan, it’s best to take the appropriate steps to improve your credit score by making timely payments and by paying down (or even paying off) any credit card balances or other revolving lines of credit before you apply for a mortgage. It is also best to avoid applying for any new credit lines or loans, for a minimum of six (6) months before you apply for your mortgage pre-approval.  When you apply for more than two new loans or credit accounts within a few months of each other, your credit score tends to go down, especially if you already have a fair-to-low credit score.  With a higher credit score, you may qualify for a lower mortgage rate and you’re more likely to get approved for the loan amount you need to buy your new home.

FHA loans are government-backed mortgage loans with lower credit score requirements. You’ll need a credit score of 580 if you want to qualify for a low-down payment of 3.5%. You can still get an FHA loan with a credit score of less than 580, but you’ll need a down payment of at least 10%.  

If you’re a veteran or a qualified active-duty service member, you may qualify for government-backed VA loans if you have a credit score of 580 or more.

2. Income and Assets

One of the most important mortgage loan requirements is adequate gross monthly income and current assets. Lenders refer to this very often as your “ability to repay” your mortgage loan.  There’s no set amount of income you need to earn to qualify for a mortgage, but you’ll need to demonstrate that you have enough income to cover all your bills and monthly mortgage payments on your new home.  

In addition, if you have a sufficient amount of liquid investments and cash reserves that are sitting in bank savings accounts, bank-issued CDs, or non-retirement investment accounts, you are much more likely to be approved because you can show a potential lender that you not only have enough income, but you also have other financial assets that you can quickly and easily use to repay your mortgage loan, if your income decreases, or even stops altogether.

Lenders consider not just your salary but other sources of income, such as:

  • Social Security payments
  • Income from investments
  • Commissions
  • Child support and alimony
  • Military benefits
  • Extra income from side hustles

3. Property Type

Your ability to get a mortgage will also depend on the type of property you intend to purchase. A primary residence is the easiest property to get approval for because you plan to live in the home for most of the year. These are less risky, so lenders usually have less stringent mortgage requirements for them. Some government-backed loans are only valid for primary residences.

If you are purchasing a secondary property as a seasonal residence or vacation home, you’ll need to meet higher down payment, debt, and credit score standards because lenders consider them riskier. The same holds true for investment properties.

4. Debt-to-Income Ratio

Lenders will look at more than just your income to determine if you have enough money to make mortgage payments. They will also look at your other loans and monthly payment obligations as well.  This is why it is critical to know your debt-to-income (DTI) ratio. This ratio tells lenders how much of your income goes to monthly debt and bills each month. Student loans, auto loans, credit card debt, and rent are all considered debts when applying for a mortgage.

Generally, you’ll need a DTI ratio of less than 43% to qualify for a mortgage, but lenders usually consider total DTI ratios of less than 36% as ideal. Lower your DTI by paying off your credit card debt and personal loans to reduce the amount of your required monthly debt payments and improve your chances of getting qualified.

4 Documents You Need to Apply for a Mortgage

Lenders will request documents for your mortgage application that demonstrate your income, your current employment, and the consistency of your employment history. Checking your recent tax returns, pay stubs, and bank statements can give lenders a good sense of your eligibility. Depending on the type of mortgage you’re applying for and your financial situation, here are a few documents you’ll need when you apply for a home loan.

1. Proof of Income

Lenders will ask you to submit your recent pay stubs to determine your current income. They’ll also ask you for a copy of your federal and state tax returns for the last two years to see if your annual income is consistent and that there aren’t a lot of fluctuations in your income.

If you have other streams of income, such as rental income, a side gig, Social Security benefits, child support, or alimony, you’ll also need to provide proof of income through direct deposits, 1099 forms, or other documents.

If you’re self-employed, an independent contractor, or a freelancer, you’ll usually need to demonstrate two years of steady income in your industry. You can demonstrate this through letters or contracts with clients, proof of insurance, a business license, a profit-and-loss statement, a cash-flow analysis form, and tax returns.  

2. Employment Verification

Lenders can verify your employment in many ways. They’ll look at your pay stubs and may also call your employer to confirm your income and employment. If you’re self-employed, you may need to provide additional information, like the location of your business, your business’s financial statements, and your ability to generate sufficient income through the business.

3. Credit Report

Lenders will also ask you for written permission to pull copies of all three of your credit reports in order to help them assess your mortgage application. Your credit score and credit history will determine the type of mortgage you qualify for. Other than your credit score, the lenders will also look at your credit report to see if there are any derogatory marks in your history, such as delinquency in payments, repossessions, or bankruptcy, to determine your eligibility.

4. Bank and Other Financial Account Statements

Lenders assessing your risk profile will review your bank statements and assets, such as life insurance and investment assets. They’ll typically use these documents to ensure that you have enough funds in your bank accounts and/or your non-retirement brokerage and investment accounts to cover mortgage payments for several months in case of an emergency. They’ll also look at your bank statements to determine if you’ve had the down payment in your account for a few months or if it’s just shown up overnight in your account.

How Much Money Am I Required to Put Down?

A down payment is an initial investment in the home that you’re required to pay upfront. It is considered your “initial financial investment” in your new home.  With a larger down payment, you’re proving to the lender that you’re committed to, and invested in, the purchase. In return, you may qualify for a lower interest rate, because it represents a lower financial risk to the lender. Let’s take a detailed look at how much you may need to put down when you apply for a mortgage.

Minimum Down Payment

You don’t always need a 20% down payment when purchasing a home. Depending on the type of mortgage you’re applying for, you can put down as low as 3.5% and still qualify for a home loan. Here’s a look at the minimum down payment requirements for different types of mortgages:

  • Conventional fixed-rate mortgages - 5%
  • Adjustable-rate mortgages - 10%
  • Jumbo loans - 10%
  • FHA loans - 3.5%

Low Down Payments

If you’re looking for a mortgage with a low down payment, there are three main options available. You can put down as little as 3.5% with an FHA loan. Many lenders will also consider borrowers with less-than-ideal credit histories if they don’t have any collection actions in the last 12 months, no more than one late payment, and on-time rental payments in the last 12 months. The property you’re purchasing also needs to be within the loan limits.

Veterans and active military service personnel can also qualify for VA loans with 0% down. Other benefits of a VA loan include no mortgage insurance premiums (MIP), no broker fees, and capped closing costs. The U.S. Department of Agriculture also offers loans in rural areas with 0% down. However, the property you are purchasing needs to meet USDA’s eligibility rules to qualify for a 0% down USDA loan.

Closing Costs

Closing costs cover expenses such as searches on the property’s title, title insurance, loan document preparation and processing, loan origination fees, and your new home’s market value appraisal. These costs are paid when you sign all of your loan and home purchase documents on your closing date, and you’ll need to account for these closing costs when you’re planning to purchase a home. The specific costs you’ll have to pay will depend on where you live and the type of mortgage you apply for.

Typically, closing costs are 3% to 6% of the total loan amount. For example, if you take out a mortgage of $300,000, your closing costs can be $9,000 to $18,000.

Additional Costs Associated with Mortgages

Buying and maintaining a home also comes with related expenses. “No matter what type of loan you choose or lender you work with, don’t forget to factor in the additional monthly costs for your new home’s property taxes, homeowners insurance, HOA fees, and any PMI premiums when you calculate your monthly payment,” says Brad Reichert, debt expert and Founder and Managing Director of Reichert Asset Management LLC.

“Rather than pay for them annually via lump sum payments at different points of the year,” shares Reichert, “many homebuyers often choose to have these necessary costs paid on their behalf, to their respective lender, property insurer, HOA board, and their local county’s Treasurer’s Office through an escrow account.” 

Reichert explains that you can make payments for these items as part of your loan payment each month. “These additional costs, if not budgeted for, may make a big difference in making your home an affordable place to live,” Reichert adds. 

Qualification Criteria by Type of Mortgage

The exact mortgage requirements you’ll need to satisfy will depend on the type of mortgage you’re applying for. Here’s an overview of the qualification criteria for different home loans.

Conventional Loans

Conventional mortgages are the most common types of mortgage loans. Here are the minimum qualification requirements for conventional loans:

  • Minimum down payment of 3% if you’re a first-time buyer. It can be higher if you have a higher DTI ratio, a lower credit score, or if you’re purchasing an investment property or second home.
  • You’ll need a credit score of 620 or more. You may be able to qualify with some lenders with a lower credit score or no credit score by demonstrating a steady payment history of rent, utilities, or car insurance.
  • Your total DTI ratio should be no more than 45%. But ideally, it should be less than 36% to improve your chances of qualification.
  • If you’re putting down less than 20%, you’ll typically need to have private mortgage insurance (PMI), which typically costs between 0.20% and 2.0% of the original loan amount, annually, or in dollar terms, about $25 to $75 per month for every $100,000 you initially borrow.  Once the equity in your home exceeds 20%, you will be able to talk with your lender about removing PMI from your monthly mortgage payments.

FHA Loans

If you’re a first-time homebuyer, an FHA loan is an ideal choice because of the low interest rates and down payment. Here are the basic qualification criteria for FHA loans:

  • Minimum down payment of 3.5%. This can be paid via gift or cash.
  • You’ll need private mortgage insurance (PMI) as well as an upfront mortgage insurance premium.
  • The minimum credit score you’ll need is 580 for a reduced down payment. But you can still get a loan with a larger down payment if you have a credit score of 500 or better.
  • You must be reasonably employed in the last two years.
  • You’ll need to occupy the property you’re purchasing for at least one year after you purchase it.
  • Your DTI ratio cannot be more than 43%.

VA Loans

VA loans are the easiest to qualify for if you’re a veteran, military service member, or a surviving spouse. Here are the minimum mortgage requirements for VA loans:

  • You left US Military service via any status other than a Dishonorable Discharge (you will need to provide your DD-214 Report of Separation Form). 
  • You don’t need any cash reserves or down payment for a VA loan, as long as you’re not paying more for the home than its appraised market value.
  • You can get approved even without a credit score, through  a nontraditional or alternative private lender. However, many lenders will want to see a current credit score of 620 or better.
  • The upper limit for your DTI ratio is 41%. You can still qualify with a higher DTI if you have good cash reserves, homeownership experience, and excellent credit.
  • You’ll need to pay a funding fee instead of mortgage insurance. If you’re a first-time VA borrower and have less than a 5% down payment, you’ll need to pay a funding fee of about 2.15%.

The Bottom Line on Mortgage Requirements

Qualifying for a home loan can be stressful and confusing for many homebuyers, but it doesn’t have to be this way. Take the time to learn more about the different loan programs available and the qualification requirements for each. You can also work with a qualified mortgage broker to make the process easier. Once you have the necessary documents and your finances in order, you’ll be one step closer to becoming a homeowner.