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Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
Updated March 15, 2020
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.
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
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)
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
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.
Loan terms assume conforming mortgage amount, 80% LTV ratio and minimum borrower credit score of 740. $150,000 minimum mortgage amount. Borrower is responsible for $995 lender fee. Loan terms are subject to change without notice.
Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click 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.
"B3-6-02, Debt-to-Income Ratios." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.
"II.A.4. Underwriting the Borrower Using the TOTAL Mortgage Scorecard." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
"Chapter 4.5. Debts and Obligations." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.
"Chapter 9: Income Analysis." Single Family Housing Guaranteed Loan Program Technical Handbook. U.S. Department of Agriculture, 2020. Web.
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. Harry is a licensed mortgage professional (NMLS #236752). More about Harry