Qualifying for a Mortgage: What You Need to Know

By Bill Lyons | Updated on February 5, 2024

Homeownership is a dream for many, symbolizing stability, investment, and the creation of lasting memories. However, before you can pick up the keys to your dream home, there’s a significant hurdle to overcome: securing a mortgage.

For many aspiring homeowners, the mortgage application process can seem daunting, filled with jargon, paperwork, and numerous financial checks. Yet, understanding the intricacies of mortgage qualification can make the journey smoother and more transparent. To get approved for a loan, you must meet your lender’s requirements, and these requirements vary with each loan type.

Keep reading to learn more about qualifying for a mortgage. In this article, we’ll break down everything you need to know, from the basic prerequisites to the nuances that can impact approval. So whether you’re a first-time buyer or revisiting the housing market, equip yourself with knowledge that can ensure a successful mortgage application.

Factors That Impact Mortgage Qualification

Becoming a homeowner is an exciting endeavor, but before that dream is realized, many people must qualify for a mortgage. Lenders meticulously evaluate various aspects of your financial health to determine your readiness and reliability as a borrower. These factors provide them with insight into the risk associated with giving you a loan. By understanding these qualifying factors, potential homeowners can better prepare and enhance their chances of mortgage approval. These factors include the following:

Credit score

Your credit score represents your creditworthiness. Lenders use this score as a predictive tool to gauge the likelihood you’ll repay your mortgage obligations. A higher credit score indicates to lenders that you have a history of managing your debts responsibly.

In addition, a higher score can unlock lower interest rates, better loan terms, and a smoother approval process. Conversely, a lower credit score might mean higher interest rates or potentially getting declined for a loan. Some mortgage programs have minimum credit score requirements, making it crucial to know and work on boosting your score if needed.

Income

Stable and consistent income is a foundational element when considering mortgage qualification. Your income provides assurance to lenders that you possess the means to make monthly mortgage payments. When you can demonstrate consistent income, the risk to the lender increases significantly.

Lenders will assess the nature and stability of your income. Regular salary or wage earnings might be viewed more favorably than sporadic or inconsistent income. Moreover, a higher income can qualify you for a larger loan amount.

Debt-to-income ratio

DTI is a metric that compares your monthly debt obligations to your gross monthly income. It provides lenders with a perspective on how much of your income is already committed to other debt responsibilities and if you can afford to take on the additional monthly mortgage payment.

A low DTI indicates that you have a good balance between your income and debt, making you a more favorable candidate for a mortgage. Conversely, a high DTI might signal overextension and could potentially limit the loan amount you qualify for or result in a loan denial.

Down payment

The down payment is the initial upfront portion of the total purchase price of the property. When borrowers make a down payment, it reduces the lender’s risk by representing the initial investment in the property. The more you invest upfront, the lower the loan amount, reducing the potential risk for the lender.

Offering a substantial down payment can lead to better interest rates and eliminate the need for private mortgage insurance (PMI). However, if you can’t afford a significant down payment, there are specific loan programs, like FHA loans, designed with lower down payment requirements.

Assets

Assets include everything from savings and checking accounts to stocks, bonds, and other properties. They provide an additional layer of assurance to lenders. In case of unforeseen financial challenges, assets can be liquidated to cover mortgage payments.

Demonstrating substantial assets can sway lenders in your favor, especially if other qualification factors are borderline. It can also influence the mortgage terms and rates you receive.

Mortgage type

Several mortgage types are available, each with its own qualification criteria. The type of mortgage you select can influence the interest rate, down payment requirement, loan term, and other loan conditions.

Some mortgages, like VA loans, cater specifically to veterans and have favorable terms. On the other hand, FHA loans might be more accessible to those with lower credit scores and down payments. Knowing which type of mortgage aligns with your financial profile can improve your chances of approval.

What Mortgage Can I Qualify for? Home Loan Requirements by Loan Type

One of the primary considerations when purchasing a home is determining which type of mortgage suits your financial situation and needs. Each mortgage type has specific home loan requirements and benefits. By understanding these requirements, you can better gauge your eligibility and streamline your path to securing your dream home.

Conventional loan requirements

Conventional loans are those not backed by the federal government, making them one of the most popular choices for borrowers. They’re typically offered by private lenders like banks and credit unions.

The qualification criteria of these loans can be more stringent, ensuring lenders mitigate risk while extending substantial amounts to borrowers. Key qualifications include:

• Credit score: Most lenders prefer a credit score of 620 and above, with higher scores often getting more favorable interest rates. This is because a higher score signals a history of timely debt repayments and responsible financial management.
• Down payment: Many first-time home buyers might find relief with down payments as low as 3%, but a down payment of 20% or more is preferable because it helps borrowers avoid PMI, an additional cost that protects lenders against defaults.
• DTI: A DTI ratio below 43% is generally the golden standard, showcasing that a borrower is not overwhelmed by existing financial obligations and can comfortably accommodate mortgage repayments.
• Private mortgage insurance (PMI): If your down payment is less than 20% on a conventional loan, you’ll be required to pay PMI, which is typically calculated as a percentage of the loan.

Conventional loans, though a popular choice, also come with various aspects to consider. Interest rates for these loans are determined by the lender and are influenced by market conditions, the creditworthiness of the borrower, and the loan term. Given that the government does not back these loans, they may have fewer restrictions on loan amounts or property types, which can be advantageous for those looking at unique properties or luxury homes.

It’s also worth noting that borrowers who manage to put down a larger down payment or have an excellent credit score will likely be able to access the best rates and terms available. Lenders often reward low-risk borrowers with competitive offers. Additionally, conventional loans come with varied term lengths — from 10 to 30 years — allowing borrowers flexibility in deciding how long they want to commit to their mortgage. Depending on a borrower’s financial situation and long-term goals, this can make a significant difference in their home-buying journey.

Read more about conventional loan requirements to see whether you qualify.

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Government-backed loan requirements

Government-backed loans are mortgages insured by federal agencies, offering lenders a safety net in case a borrower defaults. Unlike conventional loans, which are sourced from private lenders, government-backed loans come with the assurance that the federal government will compensate the lender if the borrower fails to meet their repayment obligations.

This added layer of protection means these loans come with more lenient qualification requirements, such as lower down payments and more flexible credit score requirements. However, they also carry specific eligibility requirements, depending on the program.

VA loan requirements

Tailored for veterans, active-duty service members, and certain members of the National Guard and Reserves, VA loans offer favorable terms. Key qualifications for these loans include:

• Minimum service requirement: The service eligibility requirement varies by service type but generally requires 181 days of active duty during peacetime, 90 days during wartime, or six years in the Reserves or National Guard.
• Credit score: Credit score requirements vary by lender, but many require anywhere from a 580 to 620 minimum. In some cases, Griffin Funding can provide VA loans to borrowers with credit scores as low as 550.
• Down payment: One of the most significant benefits of the VA loan is that no down payment is required, depending on how much of your entitlement you’ve already used.
• Funding fee: The funding fee varies based on service type and down payment but can be rolled into the loan amount or waived for certain service-related disabilities.

The VA loan program stands out for its favorable terms and focuses on helping veterans and military families attain homeownership. Unlike conventional loans, VA loans don’t require PMI, a substantial saving for borrowers in the long run.

At the same time, these loans come with competitive interest rates, frequently lower than conventional loan rates. This can result in significant cost savings over the life of the loan. The VA is also more lenient when it comes to qualifying criteria in the aftermath of financial hardships like bankruptcy or foreclosure.

USDA loan requirements

USDA loans are backed by the US Department of Agriculture and are part of an initiative to bolster homeownership in less densely populated areas of the country. This program makes homeownership attainable for many who might not otherwise qualify for other loan types while promoting growth in rural and certain suburban areas. Key qualifications of this loan include the following:

• Location: The USDA loan is geographically specific. The primary aim is to invigorate and sustain rural communities. Therefore, the property in question must be located in an area the USDA designates as eligible, which often translates to rural regions and certain suburban areas.
• Income: This loan has both minimum and maximum income requirements, ensuring it serves those who need it most. The maximum income limits are set based on the median incomes of the region and can fluctuate based on the cost of living and other factors.
• Credit score: While the USDA itself doesn’t mandate a strict minimum, lenders generally look for a credit score of 640 or above to offer a degree of flexibility.
• Down payment: USDA loans come with the potential for a zero percent down payment, which can be particularly beneficial for first-time buyers or those without substantial savings.

USDA loans also have the added benefit of offering competitive interest rates, often comparable to or even lower than conventional loan rates. This can be particularly appealing for borrowers who meet the requirements of this program. Furthermore, the possibility of securing a mortgage with no down payment and the potential for rolling closing costs into the loan amount can significantly reduce the upfront costs associated with purchasing a home.

FHA loan requirements

FHA loans are popular among first-time buyers due to their lenient qualification criteria. Backed by the Federal Housing Administration (FHA), these loans aim to assist those who might find it challenging to meet the stringent requirements of conventional loans. Key qualifications include:

• Credit score: For FHA loans, a score of 580 is acceptable and allows borrowers to take advantage of a 3.5% down payment requirement. Even those with lower credit scores aren’t left out and can still access an FHA loan, but they’ll require a 10% down payment.
• Down payment: A 3.5% down payment for those with a credit score of 580 or higher is remarkably lower than many conventional loans, eliminating a significant barrier to homeownership.
• Mortgage insurance: Given the leniency of FHA loans, they come with a protective mechanism for lenders in the form of mortgage insurance premiums (MIP). This involves an upfront premium, which borrowers can finance into the loan amount, and an ongoing annual premium, typically divided and added to the monthly payments.
• DTI: The FHA wants to ensure that borrowers can comfortably manage their mortgage payments and look for a DTI of 43% or lower.

In addition to relaxed qualifications, these loans offer an opportunity for those with non-traditional credit histories or who have gone through financial setbacks like bankruptcies or foreclosures to rebound. The FHA understands that financial hardships occur, and their main priority is ensuring a borrower’s current ability to repay a mortgage rather than focusing on past missteps.

The FHA loan is also inclusive in its property requirements, accommodating a wide range of housing types, including multi-family and manufactured homes.

Non-QM loan requirements

Non-Qualified mortgages, also known as Non-QM loans, recognize that not every borrower fits into the cookie-cutter mold of traditional mortgage requirements. Non-QM loans present a more flexible alternative. Key requirements for these loans include the following:

• Flexible credit scores: Where traditional mortgages may shut the door on those with certain credit scores, Non-QM loans tend to be more understanding. While they still evaluate creditworthiness, these loans are designed to accommodate those with imperfect credit histories or uncommon financial backgrounds.
• Alternative income verification: A distinctive feature of these loans is their adaptability in income verification. Not everyone has a standard 9-to-5 job, and these loans allow for alternative documentation, such as bank statements, to verify income.
• DTI: Non-QM loans may offer flexibility in DTI ratios, sometimes surpassing the traditional 43% cap.
• Down payment: Like conventional loans, Non-QM loans require a down payment. However, the down payment requirements can vary. While some might be comparable to conventional loans, others might require a larger upfront payment to balance the perceived risk.

With Non-QM loans, entrepreneurs, gig workers, and anyone with irregular income streams can qualify for a home. However, while these loans offer flexibility, borrowers should make sure they fully understand the terms and conditions. Given that these loans are inherently different from traditional mortgages, they might come with higher interest rates or different fee structures to offset the lender’s risk.

Borrowers should engage in thorough discussions with their lenders to ensure clarity on all terms and conditions to make an informed decision.

How to Get Approved for a Home Loan: 3 Tips

Becoming a homeowner can be exhilarating. However, qualifying for a home loan might seem daunting. Given the significant commitment mortgages represent, lenders must evaluate prospective borrowers to ensure they’re creditworthy.

Fortunately, there are actionable steps you can take to enhance your chances of mortgage approval. These steps can significantly influence the lender’s perception of you as a borrower and help you secure the home of your dreams.

Build up your credit score

Your credit score is a numerical representation of your creditworthiness and plays a crucial role in determining whether you qualify for a mortgage. This number comes from your credit history, and lenders use it to gauge the risk of lending you money.

Enhancing your credit score can help you secure more favorable loan terms, including lower interest rates. Over the life of a mortgage, a lower interest rate can save you thousands of dollars. In addition, with a strong credit score, lenders might be more inclined to approve you for a larger loan, allowing you to buy a more expensive property.

A high credit score also widens the array of available mortgage products, so you might qualify for mortgages that have stricter requirements or better perks.

Choose the right mortgage

Selecting the most appropriate mortgage type based on your financial circumstances can be the difference between qualifying for a mortgage and getting denied. Different mortgage types have varying requirements. By selecting one that aligns with your financial profile, you increase the likelihood of approval.

In addition, choosing the right mortgage ensures you’re not biting off more than you can chew. This will help maintain a good credit score in the long run by preventing potential defaults. Some mortgages, especially government-backed home loans, have features or perks tailored for specific demographics like first-time buyers and veterans. Using these loans can simplify the approval process.

There are several factors to consider when finding the right mortgage for you, including:

• Down payment: Certain mortgages have low down payment requirements, while others might necessitate a substantial upfront payment.
• Credit score: Depending on your credit score, you might be directed toward specific mortgage types.
• Loan duration: Whether you’re looking at a 15-year or 30-year mortgage term can influence your choice.
• Fixed vs. adjustable: Determine whether you want a fixed interest rate or if you’re comfortable with an adjustable rate that will change over time based on market indexes.

Save for a large down payment

A larger down payment means a lower loan amount, which can result in lower monthly payments. In addition, lenders offer better interest rates to borrowers who can make a larger down payment because it demonstrates financial strength and reduces the lender’s overall risk.

A down payment of 20% on a conventional loan can also help you bypass private mortgage insurance, which will add to your monthly costs.

At the same time, the more you’re willing to put down, the better your chances of getting qualified for a mortgage will be. This can be especially beneficial if some other aspects of your financial profile just barely meet the lender’s requirements.

The easiest way to make a larger down payment is to budget and save. You can set aside a portion of your monthly income specifically for your home fund. You can also invest in low-risk investments that can grow your savings over time.

Work With Griffin Funding to Qualify for the Right Mortgage

Each type of mortgage comes with its set of requirements, and aligning them with your financial profile can be confusing. Griffin Funding makes it easy to understand which mortgage programs are best suited to your specific situation and needs.

We bring years of experience in the mortgage industry with in-depth knowledge to ensure borrowers are guided to the best loan options tailored to their unique circumstances. Whether you’re eyeing a conventional loan, a government-backed loan, or a Non-QM loan, Griffin Funding offers a broad portfolio to fit every borrower’s requirements. Apply for mortgage pre-approval today to begin your homeownership journey.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.