When a home shopper decides to become a home buyer, there’s a good chance they’ll be applying for a mortgage shortly. The smartest buyers understand that knowing some of the basic loan requirements can help you avoid costly mistakes. You’re sure to save time and money by keeping the following mortgage guidelines in mind.
4 Universal Mortgage Loan Requirements
1. Credit Score
Mortgage credit scores are three digit numbers that rate your credit history and recent trends in your payment reliability. Lenders review your credit score for mortgage loans, looking for various aspects of a your financial history.
The most common mortgage credit score engine is known as the ‘FICO’. FICO scores are a number between 300 and 850 used by all three major credit bureaus (Equifax, Experian, Transition). Lenders use FICO credit scores to determine applicant interest rates too. The lower your credit score is, the higher your rate may be. Most home loan products and lenders require FICO credit scores of 620 or above to get a loan, although mortgages for bad credit scores might be available if you have mitigating factors.
Minimum Mortgage Credit Scores:
- Conventional Loans – 660
- FHA Loans – 580
- VA Loans – 620
- USDA Loans – 620
2. Employment Status
The nature of your employment is a key factor in determining your mortgage approval, and also how your income is evaluated. If your job is a salaried position and you’re paid through IRS Form W-2, your required documentation will be less scrutinized than for self-employed mortgage applicants. In fact, W-2 documented income might be all you’re asked to provide to prove you can afford the mortgage. In contrast, self-employed applicants are often required to present 2 years tax returns, 1099’s, bank statements, letters of explanation, and more.
3. Income and Debt Levels
Recent studies have shown weighing an applicant’s debt load against their income is a reliable indicator of their potential for default. Simply put, the higher an applicant’s debt is compared to their income, the more likelihood they’ll to run into trouble down the road.
Debt-to-income (DTI) is the percentage of a borrower’s debt compared to their total income. Lenders use Debt-to-Income Ratios to determine if a borrower can afford their mortgage payments. These are their limitations.
Debt-to-Income Ratio Limits:
- Conventional Loans – 28% Front / 36% Back
- FHA Loans – 31% Front / 43% Back
- VA Loans – 41% Bottom + Residual Income Requirements
- USDA Loans – 29% Front / 41% Back
4. Mortgage Limits and Property Value
Every mortgage program available features guidelines that place limits on loan amounts relative to a property’s value. The Loan-to-Value ratio (LTV) is a percentage that’s widely used to qualify a property. LTV ratios gauge lender risk, therefore stricter loan-to-value restrictions require borrower’s to have more ‘skin in the game’. LTV ratios are also used to reduce lender exposure to losses in case of default.
What is a Loan-to-Value?
The Loan-to-Value Ratio for home loans is the amount you want to borrow from a lender divided by the purchase price of the home, or it’s appraised value. Loan-to-value ratios also determine the down payment you’ll need to pay for your mortgage. Today’s most popular conventional loan programs require an LTV ratio of 80% or below, which means you’ll be making a minimum down payment of 20%. Conventional mortgage applicants with lower down payments (higher LTV ratios) will often be required to buy private mortgage insurance (PMI). PMI covers the lender for losses in case you default, and its required for all conventional loans above 80% LTV.
Loan-to-Value Limits and Down Payment Requirements:
- Conventional Loans – 80% – 97% Max LTV (3%-20% Down)
- FHA Loans – 96.5% Max LTV (3.5% Down)
- VA Loans – 100% Max LTV (0% Down)
- USDA Loans – 100% Max LTV (0% Down)
Maximum Mortgage Loan Limits:
- Conventional Loans – $453,100 – $871,450
- FHA Loans –$294,515 – $679,650
- VA Loans – $453,100 – $721,050
- USDA Loans – Location-Specific Income Limits
More Conventional Loan Requirements
More FHA Loan Requirements
More VA Loan Requirements
More USDA Loan Requirements