Home Mortgage Requirements

Although being approved for a mortgage loan depends on the type of loan you’re applying for, there are certain factors that can help or hurt your chances in almost every scenario. A good credit history and sufficient income are standard approval conditions for all loans. Lenders will not loan you a substantial amount of money without having proof that you can pay them back. Since they don’t know you personally, your credit history is their best indicator of your financial responsibility and likelihood to default on a mortgage.

Buying a house is one of the most important and financially significant decisions you will make in your lifetime, so it’s a good idea to evaluate your finances and home needs before you begin your house hunting. There are multiple types of properties on the market, and they all require different types of mortgage loans. There are programs for new constructions, renovations, vacation homes, and existing homes. Although your mortgage professional will help you choose the best mortgage for your situation, it’s advantageous to have a general understanding of mortgages and the approval process before seriously pursuing financing.

Mortgage Loan Types

As previously mentioned, mortgages come in all varieties. There is truly a loan for every buyer.

If you’re shopping for your first home or have previously purchased a home and are looking for a new property, you’re likely going to choose between a conventional, FHA, USDA, or VA loan. These loans require between zero and upwards of 20% down, depending on your financial situation and chosen house. USDA and VA are 100% financing mortgages that do not require down payments. FHA only requires 3.5% of the total purchase price at closing. The Conventional 97 loan is a new adaptation that permits 3% down instead of the traditionally required 5%-20%. There is no penalty for making larger down payments. In fact, the larger your down payment is, the smaller your monthly payment will be. Loans with larger down payments often have lower rates and mortgage insurance. Actually, if your down payment is greater than 20%, there is no mandatory mortgage insurance.

Although there are clearly benefits to making large down payments up front, many buyers today choose a low-cost mortgage because the rates are comparably low compared to higher down payment programs without the initial cost.

FHA has been one of the most insured mortgages since its inception in the 1930s. It was developed as an alternative to the impractical and unaffordable low-term, high-cost mortgages that were once the norm. It’s much easier for today’s buyers to set aside 3.5%, and they don’t even have to come up with the total themselves— FHA permits down payment gifts. The low initial cost of FHA isn’t its only appealing feature, though. FHA boasts low mortgage insurance, lenient underwriting guidelines, and loan assumability. With the future of mortgage rates uncertain, the ability for a subsequent buyer to assume your mortgage terms is very enticing. Although mortgage rates are currently at historical lows, the potential for rising rates is always a possibility. Despite the low down payment, FHA’s guaranty makes it possible for buyers to obtain mortgage rates that are comparable, if not lower, than conventional loans.

FHA offers 15- and 30-year fixed-rate mortgages as well as adjustable-rate terms. There are options for purchasing and improving homes in need of repairs; 203k construction loans for new constructions; and even a loan for financing energy-efficient improvements to your home. The FHA Streamline Refinance loan gives FHA homeowners the ability to refinance their mortgages into lower terms or rates without the hassle of income and employment verification and home appraisals. Another reason buyers continue to choose FHA over other options is because all homes are eligible for the loan and loan limits can be extended like conventional loans.

FHA loans don’t put as much emphasis on credit worthiness as we’ve seen with loans in the past. Although fair credit is still important, you don’t have to have a score upwards of 700 to be approved. In fact, FHA accepts FICO scores as low as 640 and blemishes such as foreclosures and bankruptcies aren’t immediately disqualifying.

Conventional loans still appeal to many buyers, though, especially now with the emergence of the Conventional 97 program that requires just 3% down. Like the traditional 5% minimum conventional loan, the 97 loan permits the homeowner to drop mortgage insurance after 20% equity is reached. FHA and USDA loans require mortgage insurance for the life of the loan. Like FHA, the 3% down payment may be gifted from blood or by-marriage family members, so you don’t have to come up with the cash total yourself. A potential hitch is a credit score of 740 is required if you’re receiving a gift.

The Conventional 97 mortgage loan is government-backed and is only available via Fannie Mae. Only single-family properties are eligible and the purchase price is capped at $417,000, even in high-cost areas where the loan limit is usually higher. Additionally, only 15- and 30-year fixed-rate terms are available; adjustable-rates are not offered.

For qualified buyers who want the same benefits of a traditional conventional mortgage with less cash invested upfront, the Conventional 97 program is something to consider. The ability to drop mortgage insurance after 20% equity is achieved, very low mortgage rates, and aggressively loose approval requirements make the Conventional 97 program an up-and-coming favorite.

Buyers who wish to save their cash for other expenses are in luck, now. The USDA and VA are zero-down mortgages with little to no initial cost. Not only do these loans require no down payment, they also feature very loose approval standards. USDA will accept credit scores down to 620 and VA will go even lower in some cases. Unlike FHA and Conventional loans, both USDA and VA are exclusive to certain buyers. USDA enforces income and geographical restrictions and VA is exclusive only to active military personnel, honorably discharged veterans, and surviving spouses. Despite restrictions, qualified buyers are able to take advantage of unparalleled benefits.

The USDA mortgage is also known as the Rural Development mortgage and is only valid on primary, single-family homes in designated rural areas of the U.S. USDA has defined these areas and they not only include open land but many suburbs and small cities across the nation. The likelihood of a home existing in an approved area is high unless it’s within large city limits or highly populated areas. Unlike FHA loans, USDA does not put a limit on purchase price and the loan can be used for new constructions, foreclosures, short sales, and existing homes.

In addition to geographical limitations, USDA loans also enforce maximum income limits. The U.S. Department of Agriculture developed the USDA loan in an effort to stimulate the economy in less developed rural areas where income is significantly less than in larger cities. To ensure people who are unable to come up with large down payments are the ones getting access to the program, the USDA evaluates income to verify eligibility.

Aside from the income and geography guidelines, USDA is otherwise very accessible and affordable. Credit isn’t as big of an issue as with comparable loans. Scores as low as 620 are approved and prior collections, foreclosures, and bankruptcies won’t necessarily hurt your chances for approval. USDA loans do require mortgage insurance, but the fees are all included in the total mortgage instead of being due up front and the rates are almost a point lower than FHA.

VA is very similar to USDA in regards to credit approval and underwriting conditions. Any active military personnel or honorably discharged service members may be eligible for the loan. It is 100% financing, so no down payment is expected from the buyer. Unlike other loans with no or low down payments, VA loans do not have mortgage insurance. The loan is guaranteed by the Department of Veterans Affairs so lenders are protected against potential loss. With other loans, mortgage insurance is what helps keep the loan afloat and protects the lender in the case of mortgage default. The VA home loan is one of the best benefits offered to eligible members of the military.

Preparing to Buy

It’s not mandatory, but having your finances in order and familiarizing yourself with your credit situation before applying for a loan can expedite your home purchase. The mortgage process is thorough and your lender will request a variety of legal documents from you as well as financial statements. The exact requirements will vary from bank to bank, but you can likely expect your mortgage lender to ask for your W2s or 1099s, tax returns, statements from all bank accounts and retirement funds, pay checks or proof of income, and identification including your social security card. Prior to meeting with a lender, you should ensure you have access to the necessary documents and acquire them from the respective establishments if not. Obtaining certain government documents can be a timely affair, so it may ease the loan process by requesting them in advance.

It could be very helpful to review your credit report yourself before you consult with a mortgage lender. Then you’ll be able to address any errors or take measures to improve your score if needed. Depending on the loan program, you can have a credit score anywhere between 600 and 740, but different programs are particular about what you can have on your history. USDA and FHA are lenient with their credit approval standards. USDA allows scores as low as 620 and FHA accepts 640 and above. Both loan programs will grant you a loan if you’ve had prior bankruptcies, foreclosures, or short sales and the waiting period is much shorter than required of Conventional loans. Any judgements must be cleared before you can acquire a home loan. Your credit report will list your creditors’ contact information and your account numbers so you can reach them to resolve any discrepancies or settle outstanding debt.

Some lenders require a solid job history before approving applicants. Usually a year is required, but it may be longer, especially if you’re self-employed or reliant on commissions. They may be more flexible with the amount of time you’ve been employed at a particular place, but lenders want to see at least two solid years of employment history.

Generally, mortgage programs enforce a maximum debt-to-income (DTI) ratio for approval which compares your income to your financial obligations, including the proposed mortgage payment for the house you like. A standard rule of thumb is that your debt-to-income ratio must not exceed 50%, but it varies with the mortgage and the lender. For example, USDA requires DTI to be below 41% and FHA caps it at 45%. This means your financial obligations can’t exceed 41% or 45% of your monthly income. Many people are surprised when they can’t afford the house they want because they have excessive debt. These restrictions are necessary for maintaining a healthy housing market with few mortgage defaults.

Today’s housing market makes qualifying for a home loan easier than ever. The mortgage industry is evolving along with economical needs. Rates are still historically low and affordable mortgages make homeownership obtainable for people from all financial scenarios. There are also plenty of resources for potential buyers who want to educate themselves before seriously pursuing a home loan. Whether you’re planning to buy your first home, renovate a fixer upper, or build a new home, there is a mortgage that is perfect for your needs.