What You Need to Qualify for a Mortgage in 2021


Buying a home can seem like a daunting process, and in some cases, it is.

We will try to help you understand the process better, so you will know if you qualify for a mortgage and which type of loan is best for you.

This article takes an in-depth look at the down payment and credit score requirements, debt to income ratios, qualifying income, and everything else you need to know about how to qualify for a mortgage lon.

Check if you qualify for a loan and get current rates

Minimum Requirements by Mortgage Type

Loan Type

Credit Score

Down Payment

Max DTI Ratio

Income Limit

FHA Loan

580

3.5%

43%-50%

NA

VA Loan

580-620

0%

50%

NA

USDA Loan

640

0%

50%

115% of AMI

203k Loan

640

3.5%

45%

NA

Conventional Loan

620

5% - 20%

43%

NA

HomeReady/Home Possible

620

3%

50%

 80% of AMI

Conventional 97

680

3%

43%

NA

Minimum requirements for FHA loans

  • Down payment – FHA loans require a 500 or higher credit score with a 10% down payment. Borrowers with a 580 credit score can qualify with just a 3.5% down payment.
  • Credit score – 500-579 credit score with 10% down. 580+ credit score with 3.5% down.
  • Employment – You will two years of solid employment history to qualify for an FHA loan.
  • Income – No income limits for FHA loans.
  • Mortgage insurance – FHA loans require two forms of mortgage insurance, annual and upfront. The upfront MIP fee is 1.75% of the loan amount. The annual MIP rate varies depending on the down payment amount but is 0.85% for most borrowers.
  • DTI ratio – The DTI ratio required is 43%, but in some cases, lenders can accept DTI ratios as high as 50%.
  • Occupancy – Must be for primary residence only. No vacation, investment properties, or second homes can be financed with FHA loans.

 

Minimum requirements for VA Loans

  • Down payment – VA loans do not require a down payment.
  • Credit score – The minimum down payment for VA loans vary by lender. Most lenders require a 580 to 620 credit score.
  • Employment – You will two years of solid employment history to qualify for VA loans.
  • Income – No income limits for VA loans.
  • Mortgage insurance – No mortgage insurance required
  • DTI ratio – VA loans allow for a maximum DTI ratio of 50%.
  • Occupancy – Must be for primary residence only.

 

Minimum requirements for USDA loans

  • Down payment – No down payment required for USDA loans.
  • Credit score – Minimum credit score of 620 is needed.
  • Employment – You will two years of solid employment history.
  • Income – USDA income limit is 115% of the area median income.
  • Mortgage insurance – USDA loans have the lowest mortgage insurance premiums of any type of mortgage at just 0.35%.
  • DTI ratio – The maximum DTI ratio is 50%.
  • Occupancy – Must be for primary residence only.

 

Minimum requirements for Conventional loans

  • Down payment – The down payment needed is between 3% to 20%. 3% for Home Possible and HomeReady loans.
  • Credit score – 620 credit score.
  • Employment – Two years of solid employment history to qualify.
  • Income – No income limits except on the Home Possible and HomeReady loan programs which have income limits of 100% of area median income.
  • Mortgage insurance – Not required if putting 20% down. Rates between 0.50% to 1.00% until the loan-to-value ratio reaches 78% at which point mortgage insurance is no longer required.
  • DTI ratio – The DTI ratio required is 43%, but in some cases, lenders can accept DTI ratios as high as 50%.
  • Occupancy – Can be for vacation homes, investment properties, or second homes.

 

How to Qualify

Debt-to-Income Ratios

Your debt-to-income ratio (DTI ratio) determines the loan amount you qualify for. Your DTI ratio is the amount of your income that goes towards your monthly debt obligations. Typically, 43% is the maxmium DTI ratio accepted.

For most mortgages, the maximum DTI ratio is 43%. Some loan types allow for debt-to-income ratios of up to 50%. If you have a high DTI ratio you will need compensating factors like good credit or a large down payment.

Credit

One of the biggest factors determining if you qualify for a mortgage or not is your credit score. Most types of mortgages require a 620 credit score. However,  you may qualify for an FHA loan with a credit score as low as 500.

There are set minimum credit score needed for each loan program. However, lenders don’t have to follow them and will typically set their own credit score requirements.

Minimum Credit Scores by Mortgage Type

FHA Loan

500-580

VA Loan

580

USDA Loan

620

HomeReady / Home Possible Loan

620

Conventional Loan

620

FHA 203k Rehab Loan

640

Conventional 97 Loan

680

Piggyback Loan

680

Jumbo Loan

680-720

Employment and Income

To qualify for a home loan, you will need to prove your income is sufficient and consistent. If you are paid a salary, then this should be easy. However, self-employed borrowers and commission-based jobs are more difficult.

You should have at least 2 years of documented income from the same company or in the same industry to qualify. If you earn commissions, you just need to average your income from the last 2 years of tax returns.

Qualifying Income

  • W-2 Income/Salary
  • Income from part-time jobs
  • Income from a second Job
  • Overtime and Bonuses
  • Seasonal jobs
  • Self-employed Income
  • Alimony and child support (Documentation required)

Non-Qualifying Income

 

Down Payment

For the most part, gone are the days of needing a large 20% down payment to qualify for a home. Several types of mortgages require a low down payment or no down payment at all. You don’t have to be a first time home buyer to qualify for these programs either.

FHA loans are one of the most popular types of mortgages used today because of flexible requirements. You need a 3.5% down payment for FHA in most cases. For each of the programs listed below, you can use gift funds for the down payment.

Down payment guidelines for each loan type:

FHA Loan

3.5% - 10%

USDA Loan

No down payment

VA Loan

No down payment

203k Loan

3.5%

Conventional Loan

5% - 20%

Conventional 97 Loan

3%

HomeReady Loan

3%

Home Possible Loan

3%

Piggyback Loan

10%

Jumbo Loan

10% - 20%

Mortgage Documents

There are several documents your loan officer will need to process your loan. Save yourself some time and have these documents ready to send to your lender.

  • W2’s from the past 2 years
  • 3 months worth of pay-stubs
  • Bank statements (past 3 months)
  • Previous 2 years of tax returns
  • List of your debts and assets
  • Divorce decree
  • Additional income documentation
  • Gift letter if using a down payment gift
  • 1099 forms (for self-employed and commission employees)
  • Social Security or disability income documentation

 

Frequently Asked Questions

How to qualify for a mortgage?

To qualify for a home loan, you will need a credit score of at least 580. 2 years of consistent, verifiable income with w2’s and tax returns. You will also need a down payment. However, there are several low down and no down payment loan options available.

What credit score do you need to qualify for a mortgage?

FHA loans allow borrowers to have a credit score of 500-579 with a 10% down payment. However, most lenders will not be able to process a loan with a credit score in this range. If you have at least a 580 credit score, you will have better odds of getting approved with a 3.5% down.

How much of a down payment do you need for a mortgage loan?

VA and USDA loans require no down payment. FHA loans, which are the most popular type of mortgage, require a 3.5% down payment. If you have 20% down you can avoid mortgage insurance with a conventional loan.

Check if you qualify for a loan and get current rates