Getting a home loan can be complicated and confusing for many homebuyers, but it doesn’t have it be.
This article simplifies the home buying process and explains everything you need to know about how to get approved for a mortgage.
Have a 620 Credit Score
Your credit score is one of the most important factors in determining whether or not you get approved for a home loan. 620 is the minimum credit score requirement for most mortgages, except FHA and VA loans which you can have a 580 credit score.
Credit Score Requirement by Loan Type
HomeReady / Home Possible Loan
FHA 203k Rehab Loan
Conventional 97 Loan
Improve Your Credit Score Before Applying
A few points can be the difference in whether you qualify for a mortgage or not. Your credit score not only determines if you qualify but is also the biggest factor in determining the interest rate you receive.
Make sure you are getting the best mortgage rates by maximizing your credit scores. There are a few things you can do to increase your scores before you speak to a lender.
- Pay down your credit card balances – Your credit utilization ratio is the amount of available credit you are using and it makes up 30% of your FICO score. The lower your credit card balances are the higher your credit rating will be. It is recommended that you keep your credit utilization ratio below 25%.
- Make all your payments on time – With 35% of your credit score based on your payment history, it’s essential to pay all of your bills on time. A single late payment could drop your score by as much as 75 points.
- Do not apply for or open any new credit – If you will be in the market to buy a house soon, it’s a good idea not to open any new accounts. A hard inquiry is when a lender checks your credit, and inquiries can negatively impact your credit score. It’s best to hold off on buying a new car or opening a credit card until after you close on your mortgage.
Get Pre-Approved Before Making an Offer
You’ll want to get pre-approved for a home loan before you give up your hopes. A pre-approval means a borrower has completed a mortgage application, and a lender has checked credit and verified income and assets. Many realtors will not even begin showing you homes until you have a pre-approval letter.
Documents Needed for Pre-Approval
• Last two years of W2's from all employers
• Last two years of tax returns
• 30 days worth of paystubs
• Three months of bank statements
• Profit and loss statements if self-employed
• Driver's License
Pre-Approved vs. Pre-Qualified
Being pre-qualified for a mortgage is not the same thing as being pre-approved. Home sellers will only accept offers with a pre-approval letter attached, a pre-qualification letter is useless when making an offer on a home.
- Pre-Qualified – Pre-Qualification means that a lender believes you may meet the loan requirements based on a soft inquiry into your credit history. Being pre-qualified is the equivalent of getting a pre-qualified credit card offer in the mail.
- Pre-Approved – A mortgage pre-approval means a lender not only reviewed your credit history but also verified income documents and bank statements, and based on the information, the buyer should qualify for a mortgage loan.
Have Money Saved for the Down Payment & Other Costs
The biggest hurdle borrowers have when getting a home loan is the down payment. There are mortgage programs that require less than 5% down.
3.5% - 10%
No down payment
No down payment
5% - 20%
Conventional 97 Loan
Home Possible Loan
10% - 20%
Down Payment Assistance
First-time homebuyer down payment assistance and grants are available throughout the country. You can check on the HUD website for state programs. You can also visit your local Government city or county website to check for other first time home buyer program in your area.
Closing costs are fees charged by lenders for issuing and processing a mortgage loan. Typically, the costs are between 2%-5% of the loan amount. Closing costs cannot be rolled into the loan in most cases and must be paid upfront unless the seller agrees to pay a portion of the costs for you.
Lenders require borrowers to have at least 2-3 months’ worth of mortgage payments in reserve funds. So if you’re living paycheck to paycheck then it probably isn’t the ideal time to buy a house.
A home appraisal is required to determine the market value of a home as lenders will not lend more money than a home is worth. On average the home appraisal is between $300-$700 depending on the square footage of the property.
Know How Much House You Can Afford
Your debt-to-income ratio will determine the maximum loan amount you qualify for. The debt-to-income ratio is calculated by taking your monthly debt payments and dividing it by your monthly gross income.
Use our home affordability calculator to see how much you can afford.
Know the Types of Mortgage Programs
FHA mortgage loans have become popular among first-time homebuyers. This is mainly because of the flexible credit score requirements. Borrowers with a 500 credit score may qualify with 10% down, with a 580 credit score just 3.5% down is required. This is why FHA-insured home loans are the most popular mortgage among first-time homebuyers.
The US Department of Agriculture created the USDA home loan program to help low-income homebuyers in rural areas become homeowners. To be eligible you must buy a home located in a USDA-eligible location, have a 620 credit score, and your income cannot exceed the income limit of 115% of the area median income. USDA loans finance 100% of the purchase price and have the lowest mortgage insurance premium of any type of mortgage.
Veterans of the U.S. military can take advantage of the VA home loan program which comes with no down payment or mortgage insurance. VA loans do not have a minimum credit score requirement, lenders set their own credit requirements for these loans. The typical minimum score for a VA loan is between 580-620 depending on the lender.
Conventional loans are offered by private lenders and are not insured by the Government but by private mortgage insurance companies. The down payment for a conventional mortgage is higher than government-backs loans, typically requiring between 5% – 20% down.
HomeReady & Home Possible Loans
HomeReady and Home Possible Loans – Fannie Mae and Freddie Mac created the HomeReady and Home Possible loan programs to have a low down payment program for first-time buyers. Both loans require a 620 credit score and just a 3% down payment, they are strictly for first-time homebuyers with low income. The income limit is 100% of the area median income.
The ReadyBuyer HomePath Program and 203k loans are great if you’re looking for a home renovation loan where you can purchase a fixer-upper and get additional money to make repairs or upgrades.
Fixed-Rate Mortgage – A fixed-rate mortgage loan has the interest rate locked in for the life of the loan. This ensures that the interest rate and monthly mortgage payment are consistent.
The most popular terms are 30-year and 15-year fixed-rate loans. 15-year loans come with a lower rate than a 30 year and are great for those who want to pay off their mortgage early
Adjustable-Rate Mortgage – An adjustable-rate mortgage loan is a loan that has an initial low-interest rate for a fixed period of time that will adjust afterward.
The 5/1 adjustable-rate mortgage, referred to as an ARM. The 5 means that the initial rate will be locked in for a period of 5 years. The 1 means that the rate will adjust annually after the initial period ends.
Compare Loan Offers with Multiple Lenders
Don’t make the mistake of getting a loan with the first lender that approves you. Closing costs, lender fees, and even interest rates will vary depending. on the mortgage lender, you work with.
You should get a loan estimate from at least 3 mortgage companies to make sure you’re getting a competitive offer. You can use loan estimates to help you negotiate lower closing costs and interest rates.
Frequently Asked Questions
What does getting pre-approved for a mortgage mean?
Being pre-approved for a mortgage means that a lender has checked your credit, income, tax, and bank documents and you meet the minimum requirements to qualify for a home loan.
How to get a home loan with bad credit?
For borrowers with poor credit, FHA loans are usually the best fit. Borrowers with a 500 credit score and a 10% down payment may qualify.
What credit score do you need to be approved for a mortgage?
The minimum credit score for an FHA loan is 500 with a 10% down payment. Borrowers with a 580 credit score or higher is eligible with 3.5% down.
Can I get approved for a mortgage quickly?
You can get pre-approved within a couple of hours. It takes 30-45 days from the day a lender receives your purchase agreement to close on a home.