How to qualify for a mortgage

Buying a home is an exciting milestone in life — but it can be nerve-wracking, too. It helps to know ahead of time whether you’ll be likely to qualify for a mortgage. In fact, mortgage rates continue to rise, exceeding 7% for the first time this year according to Freddie Mac’s Primary Mortgage Market Survey®. 

With rates continuing to rise, you can reduce your anxiety (and boost your odds of approval) when you know what lenders are looking for and what their requirements might be. Here’s what you need to know about qualifying for a mortgage so you can begin shopping for your new home.

How to qualify for a mortgage

When lenders review your mortgage application, they’ll be looking at a few key factors to decide whether to approve you for a home loan. Take a look at the most important ones below.

Income

Lenders are looking for borrowers with a steady work history and stable income. You don’t need a minimum dollar amount to buy a home. However, you do need to prove that you can bring in a regular paycheck to cover a monthly mortgage payment and bills. The key is showing that you have consistency in your income, which includes any side income such as: 

• Military benefits and allowances
• Additional income from a side gig (contract or a second job)
• Alimony or child support payments
• Commissions
• Investments
• Social Security payments

You’ll need to provide any documentation such as W-2s, pay stubs, and tax returns to prove your income. 

Credit score

Your credit score is a three-digit number that gives lenders an overall picture of how well you repay your debts. The typical credit score used is through FICO. These scores are calculated based only on information in your credit report maintained by the credit bureaus Experian, Equifax, and TransUnion. Based on these reports, FICO assesses how many lines of credit you have open, how much you’ve borrowed, and whether you make your payments on time. 

A higher credit score (at or above 670) usually means you’re a responsible borrower, so you’ll be more likely to make your house payments, too. However, if you have a lower credit score (below 580) you may still be able to qualify for a mortgage through a government-funded program like the Federal Housing Administration (FHA). The FHA has no minimum income requirements and accepts credit scores as low as 580. 

Debt-to-income ratio (DTI)

Another factor lenders evaluate is your debt-to-income ratio (DTI), which divides your total monthly debt payments by your gross monthly income. So if you earn $5,000 per month and your car loan, student loan, and credit card debt add up to $2,000 per month, your DTI is 40% (2,000/5,000 = 0.40). Most lenders prefer a DTI below 50% because it shows you have more room in your budget to take on additional debt.

Proof of assets

Lenders will typically ask for verification of assets, which confirms what you have in bank and investment accounts, plus any other significant assets (such as property). Your assets show the lender that you could cover your mortgage payment, at least for a time, in the event of an emergency or job loss. Assets can include:

• Cash accounts
• Retirement accounts
• Stocks and bonds
• Cars
• Boats
• RVs
• Jewelry
• Artwork
• Collectibles

What’s the difference between prequalification and pre-approval?

Both prequalification and pre-approval help you see what your mortgage could look like and estimate how much house you can afford, but they have some important differences.

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Conventional loan requirements

The most common kind of mortgage is a conventional mortgage. You can think of a conventional mortgage as a “regular” mortgage: It’s not backed by the government, so it doesn’t have some of the features of a government-insured loan. 

Conventional home loans can be conforming (meaning they conform to Freddie Mac or Fannie Mae guidelines) or non-conforming.

• Credit score: The minimum credit score you need is 620.
• Down payment: You can put down nearly any amount, although most lenders require a minimum of 3% or 5% of the cost of the property.
• DTI: Ideally, you’ll want your total DTI to be 36% or less, but lenders might approve you even if your DTI is higher than this.
• Mortgage insurance: Expect to pay private mortgage insurance (PMI) if you put down less than 20%.

Jumbo loan requirements

Jumbo loans are mortgages that are larger than traditional loan limits. While a conventional loan lets you borrow up to $766,550 ($1,149,825 in certain expensive areas of the U.S.), a jumbo loan lets you exceed that amount if the lender approves it, though you may need to pay a higher interest rate.

• Credit score: Your score will likely need to be at least 680.
• Down payment: Plan to put down at least 10%; the amount will vary by lender.
• DTI: Your lender will likely want to see a DTI below 45% for a jumbo loan.
• Mortgage insurance: As with other loans, you’ll likely need mortgage insurance with down payments under 20%.

FHA loan requirements

Loans backed by the Federal Housing Administration (FHA) have more lenient requirements than conventional or jumbo loans. These loans are well-suited for first-time buyers, buyers with lower credit scores, and buyers without the funds for a hefty down payment.

• Credit score: The minimum credit score for an FHA loan is 500 when financing 90% of the home’s value. The minimum credit score when financing 96.5% of the home’s value is 580.
• Down payment: FHA loans let you put down as little as 3.5%, making it attainable for people without a lot of savings.
• DTI: You’ll typically need a DTI of 43% or lower.
• Mortgage insurance: FHA loans require an upfront mortgage insurance payment plus monthly mortgage insurance premiums (MIP).

VA loan requirements

Veterans and active-duty military can take advantage of loans backed by the U.S. Department of Veterans Affairs. These loans offer no down payments and competitive interest rates for eligible service members and their families.

• Credit score: No minimum credit score requirement from the VA; lenders might have their own requirements.
• Down payment: Not required for VA loans, as long as the sales price doesn’t exceed the home’s value.
• DTI: There’s no maximum allowable DTI for VA loans, but your lender may wish to see compensating factors (such as savings) if your DTI is above 41%
• Mortgage insurance: Not required for VA loans.

USDA loan requirements

If you have a low or moderate income and are interested in living in the countryside, a USDA loan could help. These mortgages are backed by the U.S. Department of Agriculture and are designed to help people afford to buy homes in eligible rural areas.

• Credit score: No minimum credit score required.
• Down payment: USDA loans are available with no down payment required.
• DTI: Aim for 41% or lower DTI for a USDA loan.
• Mortgage insurance: Not required for USDA loans, although there is a required guarantee fee which is usually rolled into your monthly mortgage payment.

Mortgage application documents

There are some common documents you’ll likely need during the mortgage qualification process. Gather these up before you apply so you have them handy:

• Pay stubs: These show your recent wages and take-home pay.
• W-2s: These show your total wage income for previous years.
• Banking statements: These provide details on the assets in your checking, savings, and investment accounts.
• Tax returns: If you’re self-employed, your Form 1040 and related schedules display your net income. You may need to show a profit and loss statement as well.
• Pension check stubs: If you receive a pension, provide the check stubs.
• Social Security income: Provide the check stub or statement for any Social Security or disability benefits you receive.
• Gift letter: If you’re using a gift from family to buy your new home, provide a detailed letter along with supporting documentation (such as a statement showing the deposit).

How to improve your odds of qualifying for a mortgage

There are several strategies you can use to increase your chances of mortgage qualification:

• Save more for your down payment: A bigger down payment will lower your loan-to-value (LTV) ratio, or the size of the loan as compared to the value of the home. Show your lender you’re serious about this mortgage by boosting your down payment savings; this might mean accelerating your savings rate, putting some big purchases on hold, or picking up a few shifts at work.
• Raise your credit score: Raising your credit score will not only help you get approved for a home loan, but it also could secure a lower interest rate. Making timely payments is one of the best ways to raise your score.
• Reduce your DTI: While you’re concentrating on making your bill payments on time, try aggressively paying down your debts to reduce your debt-to-income ratio. You could also request a raise at work to increase your income.
• Get a cosigner: If your credit history isn’t strong enough to qualify, consider a cosigner with strong credit. They won’t be entitled to your property but instead will be jointly responsible for the loan with you.

Qualifying for a mortgage FAQ

What are the four things you need to qualify for a mortgage?

There are four important factors the lender will be evaluating: the property, your income, your assets, and your credit. For the best odds of approval, it helps to have a steady income and sufficient funds for a down payment. You’ll also want to make sure you have a strong enough credit history and that the home you intend to buy is within your means and priced appropriately.

What income do you need for a $400K mortgage?

Roughly speaking, you may need to earn $130,000 per year if you want a $400,000 home. Here’s the breakdown: A $400,000 mortgage with a fixed interest rate of 7.5% would give you a monthly mortgage payment of $2,797. To keep your front-end ratio (your housing costs compared to gross monthly income) below 25%, which many lenders prefer, you’d need to earn $11,188 per month, or $134,256 per year. Some lenders may approve you for a loan that size with a lower income, however, so it’s worth it to make your loan application as strong as possible.

What would disqualify you from getting a mortgage?

“Not meeting the minimum credit score requirements is usually the biggest reason for a denial of a mortgage,” said Jeremy Schachter, a branch manager at Fairway Independent Mortgage Corporation. “Going over the maximum debt vs. income requirements is the other main reason you get denied from a mortgage loan.” 

What are red flags for mortgage underwriters?

Erin Sykes, chief economist and luxury real estate adviser at Nest Seekers International, warns homebuyers with poor credit to be cautious when applying for a mortgage.

“Bankruptcies, multiple card payments, a low credit score, and previous mortgage defaults will throw up red flags for underwriters,” she said. “You don’t get a second chance to make a first impression, so make sure you clean up your credit footprint before approaching lenders.”