How Do You Qualify for a Mortgage?

If you’re considering buying a home using a loan, it’s important to understand what you need to qualify for a mortgage. Fortunately, there are some clear guidelines that mortgage lenders use to determine who is eligible to borrow.

We’ll go over the requirements to qualify for a mortgage to help you evaluate your financial situation.

Key Home Loan Qualification Requirements

Mortgage lenders want to make sure you’re likely to pay back what they allow you to borrow. While different lenders have different policies about what specific credentials you need to get approved to borrow, some key financial metrics are almost always considered. These financial details can determine if you’ll be approved to borrow and what your loan terms will be.

Credit Score

Credit score is one of the most important factors lenders consider. This three-digit score is calculated using data from creditors on payment history and use of credit. Higher credit scores lead to better rates because you present less risk.

Most lenders require a minimum credit score of 620 to be eligible to borrow. However, if you’re taking out an FHA loan, you could qualify with a score as low as 500 with a 10% down payment. VA and USDA loans also have flexible requirements

Income

Lenders want to make sure you have enough income to pay back the loan. Higher income and a consistent, stable employment history enhance the likelihood of lender approval for financing at competitive interest rates.

Many financial experts recommend keeping housing costs below 25% to 30% of your income. Lenders will set maximum limits, which vary, but often your principal, interest, taxes, and insurance must be below 28% of your income.

You may be asked to provide your bank statements, pay stubs, and tax returns to show your income so lenders can confirm the amount you make.

Employment

Traditionally it’s been more difficult for people who are self-employed or who have irregular income to get approved for a home loan. However, underwriters are now open to considering a wider variety of income sources, including income from self-employment and money earned by gig workers.

While you can qualify for a mortgage if you’re self-employed, you still may need to provide additional documentation or meet more stringent requirements to demonstrate that your income is stable and likely to continue.

Debt-to-income ratio

Lenders don’t want you to be overwhelmed with debt. To make sure that doesn’t happen, they look at how much of your income goes toward paying creditors. This is called your debt-to-income ratio.

The maximum DTI for a mortgage varies by lender, but many prefer your monthly mortgage payment, including principal, interest, taxes, and insurance to take up no more than 28% of your income, with total debt payments no more than 36%.

Assets

There are significant upfront costs when you get a mortgage, including a down payment, closing costs, prorated property taxes, and insurance.

Lenders review your assets to confirm you have the money to pay these costs. Some home loan providers also want to see that you’ll have some cash reserves, or assets available even after covering up front costs, to cover the mortgage payment if something happened to your job.

Lenders may ask for statements from bank accounts, investment accounts, retirement accounts, and cash value life insurance policies. If you have already own real estate, they’ll want to know your equity.

Down Payment

Finally, most lenders require you to have a down payment to buy a home. If you can put 20% down, this will give you the broadest choice of lenders, allow you to qualify for lower mortgage rates, and let you avoid private mortgage insurance. However, some lenders do allow loans with much lower down payments — even as low as 3% or 3.5% down.

You can use a down payment calculator to estimate the down payment you need to buy a home.