Mortgage Qualification Guidelines

• Mortgage Qualification Overview

Most lenders use a similar set of mortgage qualification guidelines to evaluate your loan application.  Qualification requirements can vary by lender type, mortgage program and loan amount but there are several key factors that typically apply to all borrowers:

• maximum debt-to-income ratio
• minimum credit score
• required down payment
• residence history
• borrower employment history
• lender underwriting guidelines

Understanding how these guidelines apply to your personal and financial profile enables you to determine if you can qualify for a mortgage. It is also important to understand how mortgage qualification guidelines influence each other. For example, if you make a larger down payment, you may be able to qualify for a mortgage with a lower credit score. Or if your debt-to-income ratio is relatively low, your required down payment requirement may be lower.

Additionally, because lender may apply their own mortgage qualification guidelines, borrowers should always contact multiple lenders before selecting a loan. While you may not meet one lender's requirements, you may be able to qualify for a mortgage with a different lender.

Finally, different mortgage programs have different eligibility and qualification requirements. For example, you may not be able to qualify for a conventional loan with a low credit score but you may be able to qualify for an FHA loan. Or if your credit score is lower than 580 you may not be able to qualify for an FHA mortgage with a 3.5% down payment but you may be able to qualify if you make a 10% down payment. It is important to understand how mortgage qualification guidelines vary by loan program. Just because you cannot qualify for a standard conventional loan does not mean you cannot qualify for all mortgage programs. We encourage borrowers to contact several lenders to learn about the loan programs available to them.

There are multiple factors that determine a borrower’s ability to qualify for a mortgage and it is important to highlight that a borrower’s ability to qualify for a mortgage may be different than a borrower’s ability to afford a mortgage. For example, borrowers may be able to afford a monthly mortgage payment based on their income and debt but they may not qualify for the mortgage because they do not meet other qualification requirements such as the minimum credit score or employment history requirements.

• Review the table below to understand how mortgage qualification guidelines apply to you
• Debt-to-Income Ratios

  • Lenders review your monthly gross income and debt to determine what size mortgage you can afford
  • Lenders analyze your debt-to-income ratio, or the ratio of how much you spend on monthly debt payments such as your mortgage and credit card bills relative to your monthly income
  • Lender guidelines typically allow a borrower to spend a maximum of 50% of their monthly gross income on their mortgage payment, other housing expenses such as property tax and insurance plus other monthly debt including credit card, auto and student loan payments
  • We provide a thorough overview of how lenders use debt-to-income ratios to determine what size mortgage you qualify for
  • Additionally, most lenders analyze your financial profile to make sure that you have the ability to repay the mortgage you are applying for using the government's Qualified Mortgage (QM) Guidelines

  Credit Score and Credit Report

  • The lower your credit score the more difficult it is to qualify for a mortgage or the higher the interest rate you will pay
  • Lenders typically require that borrowers have a credit score of at least 620 although the FHA Mortgage Program is available to borrowers with a credit score of 580 and lower in some cases
  • We offer a detailed discussion on your Credit Score and the Mortgage Process
  • Additionally, negative events in your credit history may impact your ability to qualify for a mortgage
  • For example, if you experienced a short sale you may not be able to qualify for a mortgage for two years and if you experienced a foreclosure you may not be able to qualify for a mortgage for seven years

  Type of Employment and Employment History

  • Lenders typically want to see that you have two years of continuous employment history (unless you have recently graduated from college) before you apply for a mortgage
  • If a borrower has recently changed jobs and the new job has a probation period, the lender may wait until the probation period is over before approving the borrower for a mortgage
  • If you have less than two years of continuous employment history it may be challenging for you to get a mortgage but lenders do have some discretion on this point
  • If you can effectively explain the gap in your employment or highlight the strength and stability of your current job and monthly income, a lender may be willing to provide you a mortgage
  • Some lenders may not offer mortgages to self-employed borrowers or it may be more difficult for self-employed borrowers to qualify for a mortgage
  • Self-employed borrowers typically must provide a minimum of two years of federal tax returns verifying their income when applying for a mortgage (lenders usually average the prior two years of self-employed income)

  Your Down Payment

  • The size of your down payment may affect your ability to qualify for a mortgage or to receive the lowest interest rate from a lender
  • Some lenders require that borrowers make a down payment of 20% of the property purchase price in order for the borrower to receive their lowest interest rate
  • We provided a detailed discussion on What Size Down Payment Do I Need to Make? that addresses how your down payment may impact your interest rate and we also review programs that allow you to buy a home with a low or no down payment

  Residence History

  • Borrowers are typically required to provide two years of residence history when applying for a mortgage
  • Residence history includes both properties you have owned and rented

  Lender Underwriting and Qualification Guidelines

  • Lenders use underwriting and qualification guidelines to evaluate borrowers and decide if they will lend borrowers money.  These guidelines can vary across mortgage lenders
  • The lender underwriting process involves reviewing a borrower's mortgage application as well as personal and financial documents.  There may be some variation between lenders but most lenders request the same information.  You can review our mortgage document checklist so you know the documents lenders typically request
  • Underwriting focuses on the borrower's credit worthiness, ability to repay the loan and financial profile including income sources and debt accounts
  • Lenders also apply a set of internal qualification guidelines to evaluate mortgage applicants.  For example, some lenders may choose to not work with self-employed borrowers.  Additionally, a lender may not offer certain mortgage programs which may prevent some borrowers from working with that lender.  Lenders have some discretion over borrower qualification guidelines so be sure to understand how a lender's policies apply to you
  • This is also why it is important to contact multiple lenders when you are shopping for a mortgage.  Because lenders have different underwriting and qualification guidelines, one lender may decline an applicant while another lender may approve an applicant
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  Monthly Housing Payments

  P & I Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
  Mortgage Insurance Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%. (Estimated)
  Property Tax Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ... (Estimated)
  Homeowner Insurance Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ... (Estimated)
  Homeowner Association Fee Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs. (If Any)
  Total Monthly Housing Payments

  Lender Fees

  Points Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
  Origination Fee Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
  Credit Report Fee Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
  Tax Service Fee Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
  Processing Fee Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
  Underwriting Fee Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
  Wire Transfer Fee Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower. (If Any)
  FHA Upfront Premium FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception. (If any)
  VA funding Fee (If any)
  Flood Fee
  Other Fees Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees) The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.
  Total Lender Fees

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  Current Mortgage Rates as of October 19, 2018

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• Related FREEandCLEAR Resources
  • Credit Score & Getting a Mortgage
  • What Size Down Payment Do I Need to Make?
  • Borrower Debt-to-Income Ratio Guidelines
  • MORTGAGE QUALIFICATION CALCULATOR