How Do You Need to Qualify for a Mortgage?

So, you’re ready to take the leap and become a home owner. For most of us, homes come with mortgages. These large loans take decades to pay off and cost thousands of dollars in interest, but they make it possible to purchase a house you’d otherwise be unable to afford.

Different loan types have different rules

Loan qualification requirements depend on which type of loan you receive, so you’ll first need to understand different categories of mortgage loans. Home loans can be broadly divided into two different categories: conventional loans and government-backed mortgages.

  • Conventional loans are issued by private lenders without any government guarantees. Some, but not all, conventional loans are resold to government-sponsored entities.
  • Government-backed mortgages are issued by private lenders but are guaranteed or insured by the government. If you don’t repay the loan in full, the government makes the lender whole.

Each of these categories can also be broken down into various individual loans.

Government-backed mortgages

A few different government agencies insure or guarantee mortgages to help would-be homeowners get approved for loans. Some agencies cater to specific populations. Government-backed mortgages include:

  • FHA loans: The federal Department of Housing and Urban Development (HUD) manages a mortgage insurance program operated by the Federal Housing Administration. FHA loans are some of the easiest mortgages to qualify for, especially as the down payment requirements are as low as 3.5%. But borrowers must pay for mortgage insurance both up front and over time, making it potentially more expensive than the private mortgage insurance that comes with low-down-payment conventional loans. Mortgage insurance, which protects the lender by ensuring full recovery of lost funds in case you default, costs 1.75% of the loan amount up front and 0.80% to 0.85% of the borrowed amount per year. FHA loans are especially popular with first-time borrowers, but anyone can get an FHA loan.
  • VA loans: The federal Department of Veterans Affairs (VA) guarantees loans for current and former members of the military and their families. VA loans provide very favorable terms to eligible borrowers and have limited qualifying requirements. You can get a VA loan with no down payment so long as the home isn’t worth more than you pay for it, and there’s no minimum credit score to qualify. You also don’t have to pay for mortgage insurance, although you do have to pay an up-front funding fee of of between .5% and 3.3% of the loan amount unless you fall within an exception for disabled vets or military widows or widowers.

    Must-haves to qualify for a mortgage

    Some of the basics you’ll need in order to be approved for any type of home loan include:

    • A reliable source of income
    • A debt-to-income ratio that falls within permissible guidelines
    • A fair or good credit score
    • A down payment

    Let’s take a look at some of these key requirements, the specifics of which vary based on loan type.

    A reliable source of income

    One of lenders’ biggest concerns is your cash flow. Lenders want to know you have money to pay back your loan, which means you need a steady source of verifiable income. This can come from:

    • A salary from work
    • Bonuses and commissions
    • Self-employment income
    • Alimony or child support
    • Social Security income
    • Qualifying investment income, including income from interest and dividends
    • Income from rental properties
    • Tax returns
    • W2s or 1099 forms from employers or companies that pay your business
    • Pay stubs
    • Bank statementsA front-end ratio of 28% or less and a back-end ratio of 36% or less is considered ideal and is the standard most lenders use to determine who will get the most competitive mortgage rates.

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