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Mortgage Qualification Guidelines

Mortgage Qualification Guidelines

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

    • Debt-to-income ratio.  Lenders want to make sure you can afford your mortgage so they limit how much of your income you can spend on your monthly payment and other debt expenses.  The higher the debt-to-income ratio used  by the lender, the higher the loan amount you can afford.  
    • Credit score.  Your credit score is an indicator of how likely you are to make your mortgage payments on time and repay your loan.  Lenders also use your score to assess your credit-worthiness as well as the risk you default on the mortgage.  The higher your credit score, the better your loan terms including your mortgage rate and closing costs.  
    • Down payment.  Your down payment is how much of the purchase price you contribute.  The higher your down payment, the better for the lender because your mortgage amount is lower plus you have more at stake financially so you are less likely to default on your loan.  While there are a multitude of no and low down payment programs, lenders usually require that you make a down payment of 20% to receive the best loan terms.
    • Employment history.  Your employment history reflects your job security as well as the stability of your income going forward.  Lenders verify your current employment and also review your job history for the prior two years including employer(s), type of work and how you were paid.  
    • Residence history.  Lenders review your residence history to make sure that you have made your mortgage or rent payments on time in the past.  They also like to see that your future mortgage payments are consistent with housing payments you have made in the past so that you can afford your monthly loan payments going forward.  You may be required to explain any gaps in your residence history such as if you lived with a relative rent-free.
    • Lender underwriting.  Lender underwriting is the internal process lenders use to review your loan application and determine if you are approved for the mortgage.  The underwriter usually requests additional information or documents before your loan receives final approval and moves to funding. Underwriting is typically the most time-consuming part of the mortgage process.

    The table below outlines how lenders typically apply the mortgage qualification guidelines to applicants, including the specific criteria used for each requirement.  Understanding how these guidelines apply to your personal and financial profile enables you to determine if you can qualify for a mortgage.

  • Mortgage Qualification Requirements
    • Lenders review your monthly gross income and debt payments to determine what size mortgage you can afford
    • Lenders analyze your debt-to-income ratio, or how much of your income you spend on monthly debt payments for your mortgage, property tax and homeowners insurance as well as for credit cards, car and student loans
    • Lender guidelines typically allow a borrower to spend a maximum of 43% to 50% of their monthly gross income on their mortgage payment and other housing expenses plus other monthly debt payments
    • 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
    • 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 as low as 500 in certain cases.  Other programs do not have a minimum credit score requirement and permit the use of non-traditional credit profiles to qualify for a mortgage
    • 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 although the waiting periods are shorting if an extenuating circumstance such as a job loss or illness contributed to the credit event
    • Review our detailed discussion of the Credit Score Required for a Mortgage
    • 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)
    • The size of your down payment may affect your ability to qualify for a mortgage or your interest rate
    • Some lenders require that borrowers make a down payment of 20% to receive their lowest mortgage rate
    • Review our comprehensive discussion on What Size Down Payment Do I Need to Buy a Home?
    • Lenders use underwriting and qualification guidelines to determine if they will lend you 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, assets 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 before you submit your loan application
    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
  • Because qualification guidelines vary, borrowers should always compare several mortgage proposals including loan terms and requirements. While you may not meet one lender's guidelines, you may be able to qualify with a different lender.  We recommend that you contact multiple lenders in the table below to learn more about their qualification requirements and mortgage terms including interest rates and closing costs.  Shopping lenders is also the best way to save money on your mortgage.

  • Rate Details*
    Loan Program:  
    Monthly Payment:  
    APR:  
    Rate:  
    Points  More Info:
    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.
     
    Total Lender Fees:  
    Loan type:  
    Property Value:  
    Loan to Value:  
    Credit Rating:  
    Date Submitted:  
    Monthly Housing Payments
    P & I More Info
    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 More Info
    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 More Info
    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 More Info
    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 More Info
    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 More Info
    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 More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    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 More Info
    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 More Info
    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 More Info
    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 More Info
    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 More Info
    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 More Info

    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
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of December 11, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • What You Need to Know About Mortgage Qualification Guidelines
  • It is important to understand that 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, you may be able to make a lower down payment. Additionally, if your credit score is high and your employment history is stable, the lender may apply a higher debt-to-income ratio, which enables you to qualify for a larger mortgage.

    Because the qualification requirements are inter-related it is important that your loan application is as strong as possible for each guidelines. This is why applicants often attempt to boost their credit score or reduce their debt expense before they apply for a mortgage -- because it improves their overall ability to qualify for the loan

    You should also recognize that being able to afford a specific loan amount is different than being approved for a mortgage.  For example, you may be able to afford the monthly payment for the loan you want based on how much money you make but you may not be approved because you do not meet certain qualification guidelines such as the credit score or employment history requirement.  Just because you can make the mortgage payment does not mean that the lender automatically approves your loan application.  Plus, you also need to take into account additional housing costs such as property tax and homeowners insurance which lenders factor in to determine the loan you qualify for.

    Mortgage qualification requirements also vary by loan program so it is important to explore your financing options.  If you cannot qualify for a standard conventional loan, you may still be able to get approved for a government-backed program.  For example, you may not qualify for a conventional loan with a 600 credit score but you may be able to qualify for an FHA mortgage.  Or if you have limited funds for the down payment on an FHA mortgage, you may be approved for a VA or USDA home loan which require no down payment.

    Understanding that qualification requirements differ by mortgage program is especially important for applicants that are on the borderline in terms of being approved.  Finding the right program may enable you to qualify for a mortgage and buy a home when you thought it may not be possible.  That is why we always encourage borrowers to contact several lenders to learn about the loan programs that are applicable to them.  Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including several no or low down payment options.

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  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    Conventional Loan Qualification Requirements: https://www.fanniemae.com/content/guide/sel100218.pdf

    FHA Loan Qualification Requirements: https://www.hud.gov/sites/documents/40001HSGH.PDF

    VA Home Loan Requirements: https://www.benefits.va.gov/WARMS/docs/admin26/pamphlet/pam26_7/ch04.pdf

    USDA Home Loan Requirements: https://www.rd.usda.gov/publications/regulations-guidelines/handbooks#hb13555

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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