How Hard is it to Qualify for a Mortgage? (2024)

What’s keeping you from applying for a mortgage? Maybe you’re worried that your credit score isn’t high enough or you have too much debt. Perhaps you’re afraid that mortgage lenders will require a large down payment that you won’t be able to afford.

Here’s a surprise: Qualifying for a mortgage isn’t as difficult as you may think. A 2018 study by Fannie Mae found that most consumers overestimate the requirements for getting a mortgage, particularly in regard to credit scores and down payments. Despite the stiff housing market in 2024, the qualification standards that the survey respondents guessed are still too high – 6 years later.

If you’re worried that your finances aren’t strong enough for a mortgage, don’t fret. You might be more qualified for a home loan than you think.

Mortgage Loan Qualifications

Qualifying for a mortgage means that a borrower meets the criteria set by lenders to be approved for a home loan. These criteria measure a borrower’s ability to repay the loan and how much house you can afford.

Qualification requirements vary by lender, but many use similar benchmarks (depending on the loan type). Here are four key factors that lenders use to evaluate your loan application:

1. Credit Score – FICO credit scores, which most mortgage lenders rely on, range from 300-850. Credit scores help lenders assess a borrower’s risk and the likelihood that they will repay the loan. Most importantly, credit scores directly affect your mortgage interest rates. The higher the credit score, the lower the interest rate you can qualify for.
   
2. Income and Employment –Lenders evaluate your income and employment history through pay stubs, tax returns, and verification letters. Lenders want to see you have a stable source of income, so most require a minimum of 2 years of steady employment at the same job.
   
3. Debt-to-Income Ratio (DTI) – DTI is the ratio of your monthly debt payments to your gross monthly income. Most lenders want to see a DTI below 45%, and obtaining a loan with a DTI above 50% can be difficult.
   
4. Down Payment – Down payments help reduce a lender’s risk by reducing the amount that you owe. A larger down payment may increase your chances of qualifying and typically results in better mortgage terms, such as lower interest rates. Average down payments range from 0% to 20%, depending on the mortgage type.

How Hard Is It To Get a Mortgage?

How hard it is to get a mortgage largely depends on your financial health. However, your ability to qualify will vary depending on the mortgage type. And on top of that, mortgage lender requirements differ as well.

Let’s review the qualification standards that average lenders require for common loan types:

*The Department of Veterans Affairs (VA) does not set a minimum credit score but lenders do.

Can You Qualify For a Mortgage Without a Job?

It’s possible to qualify for a mortgage without a job as long as you have other sufficient sources of income. When calculating how much you can afford, lenders look at your “residual income,” which is how much income is left over after paying your other bills and expenses.

Compensating Factors

Potential buyers should also know that strength in one requirement area can help make up for weakness in another. This is because some lenders offer qualification flexibility through “compensating factors.”

Compensating factors are positive attributes or circ*mstances that can help offset weaknesses in your financial profile – such as a lower credit score or higher debt-to-income ratio. For example, if you have a “very good” credit score (740+), some lenders may consider that a compensating factor for a higher debt-to-income ratio.

This is why applying with different lenders is so important when surveying your options.

As stated above, qualification eligibility varies by mortgage type. However, before committing to any loan type, you should consider factors outside of the main four qualification standards that lenders use (credit score, DTI, down payment, employment).

How Hard Is It To Get a VA Loan?

Getting a VA loan is an attractive loan option as it typically has lower rates than conventional mortgages and offers a $0 down payment option.

However, not everyone can get a VA loan, even if they meet the financial requirements.

VA loans have service requirements set by the Department of Veterans Affairs that borrowers must meet to qualify.

Service Requirements

Generally, VA loans are generally available to active-duty service members, Veterans, and National Guard and Reserve members who meet service length and discharge status standards, as well as some surviving spouses.

Occupancy Requirements

VA loans are meant to finance primary residences. In general, borrowers must occupy the home within 60 days of purchasing and reside in the house for at least 2 years.

However, these requirements allow exceptions for active-duty service members who have to move due to ETS.

Mortgage Insurance

VA loans don’t require mortgage insurance, but they do have a mandatory funding fee.

The VA funding fee is a one-time payment made at purchase. Depending on the down payment size, it varies from 1.25% to 2.15% of the loan amount for first-time va loan users and 1.25% to 3.3% for repeat VA loan borrowers. However, Veterans who receive service-connected disability are exempt from paying the VA funding fee.

How Hard Is It To Get an FHA Loan?

FHA loans are generally regarded as a more accessible mortgage program because they offer the lowest minimum credit score (500) compared to other mortgage programs.

They also require a smaller down payment than conventional mortgages.

Minimum Down Payment

Like most mortgage options, FHA down payment amounts are tied to credit score. A down payment of 3.5% is required for borrowers with a credit score of 580 or higher. If you have a credit score below 580, it is still possible to qualify, but expect to put a down payment of 10% or more. This is a great deal, considering you can’t even qualify for a conventional mortgage with a score below 620.

Mortgage Insurance Required

FHA loans require two types of mortgage insurance (MIP):

• Upfront Mortgage Insurance Premium (UFMIP): UFMIP is 1.75% of the loan amount, and most borrowers roll it into the loan amount.
• Annual Mortgage Insurance Premium (MIP): FHA borrowers must pay an annual mortgage insurance premium in addition to the upfront premium. The annual MIP rate differs based on your loan term, loan-to-value ratio, the size of the loan, and down payment amount.

Let’s look at how the size of your down payment affects how much annual mortgage insurance you’ll pay:

• Down Payment Less than 10%: If your down payment is less than 10% of the purchase price, the annual MIP is required for the entire loan term, regardless of the loan-to-value ratio.
• Down Payment of 10% or More: If your down payment is 10% or more of the purchase price, your annual MIP is required for a minimum of 11 years. After 11 years (and when the loan-to-value ratio reaches 78%), MIP gets canceled.
• Down Payment of 22% or More: If your down payment is 22% or more, you don’t have to pay annual MIP.

Occupancy Requirements

Similarly to the VA loan, FHA loans are meant to finance primary residences. As such, buyers must occupy the home within 60 days of closing and live there for at least a year.

How Hard Is It To Get a USDA Loan?

Getting a USDA loan can be challenging compared to other types of home loans because they are designed to assist low-income homebuyers in rural areas. However, they offer great benefits like a $0 down payment and no mortgage insurance.

Location Restrictions

USDA loans are intended for properties in rural or eligible suburban areas. You must ensure that the property you’re interested in is in an eligible location in order to qualify.

Income Limits

USDA loans have income limits that cannot exceed 115% of your area’s median income. These income limits also vary by the number of people in your household.

Mortgage Insurance

USDA loans do not require mortgage insurance but, instead, a “guarantee fee.” As of 2024, the USDA guarantee fee is 1% of the loan amount upfront and 0.35% annually.

How Hard Is It To Get a Conventional Loan?

Outside of programs like Fannie Mae and Freddie Mac’s first-time homebuyer programs, getting a conventional loan can be more difficult than government-backed mortgages like FHA, VA, and USDA loans because they typically have stricter credit and down payment requirements.

However, conventional loans typically have higher loan limits (without reaching jumbo loan territory) and more flexible loan terms than government-backed mortgages.

Credit Score

Conventional loans often require higher credit scores compared to FHA or VA loans. A credit score of 620 is considered the minimum requirement, but many lenders prefer scores above 700 for better terms.

Though most loan types increase their interest rates as your credit score drops, conventional loans charge the highest interest rate increases as your score drops below 740. These increases start small, then quickly get bigger, so by the time your score falls into the mid-600s, you could be charged a rate a full 2% higher than a borrower with “perfect” credit.

Private Mortgage Insurance

The cost of Private Mortgage Insurance (PMI) on conventional loans can vary depending on several factors, including the loan amount, down payment, credit score, and the specific terms negotiated with the lender. PMI typically costs between 0.58% to 1.86% of the original loan amount annually.

Down Payment

A down payment of at least 3% is necessary; however, most conventional loans require down payments of 5% to 20% of the purchase price, depending on your creditworthiness and the specific loan program.

Your down payment on a conventional loan affects how much PMI you pay. If your down payment is less than 20%, you’ll likely need to pay for private mortgage insurance (PMI) until you built up at least 20% equity in the home.

PMI can typically be canceled once you reach a loan-to-value (LTV) ratio of 78% through regular monthly payments.

Overall, understanding mortgage qualifications is essential for anyone considering the journey towards homeownership. Whether you’re exploring government-backed options like FHA or VA loans or you’re leaning towards a conventional loan, these qualifications can impact your ability to secure a mortgage, the terms of your loan, and the overall cost of homeownership.

Remember, each lender has slightly different requirements, so shop around and seek guidance from mortgage experts.