--- title: How to Qualify for a Mortgage description: To qualify for a mortgage, you’ll need to meet your lender's eligibility requirements regarding credit, income and debt. published: '2021-07-22T16:25:14.000Z' modified: '2024-01-10T13:42:55.000Z' section: Mortgages tags: - Guides - mortgage qualification word_count: 2163 canonical: https://money.com/how-to-qualify-for-a-mortgage/ type: Article source: structured-blocks --- > **Disclosure:** We may earn a fee if you click on the links below. Compensation does not determine ranking. Not all brands are included. [Learn more](https://money.com/page/disclaimer/). ![Woman With Winner Ribbon Containing A House Silhouette On Shirt](https://img.money.com/2021/06/Mortgage-How-To-Qualify.jpg) Homeownership is no small step. To qualify for a [mortgage](https://money.com/what-is-a-mortgage/), you’ll need to meet your lender's eligibility requirements. Most financial institutions consider your credit score, debts and income when determining your ability to secure a mortgage loan. Before you start shopping for mortgage rates, consider the following tips to improve your chances of approval and make the process easier. ## Table of Contents - [Step 1: Work on your credit](#step-1) - [Step 2: Save up for a down payment](#step-2) - [Step 3: Lower your debt](#step-3) - [Step 4: Get pre-approved](#step-4) - [Step 5: Calculate closing costs](#step-5) - [Step 6: Factor in mortgage insurance](#step-6) - [Step 7: Shop for rates](#step-7) ## Steps to qualify for a mortgage Whether you’re a first-time homebuyer or interested in [refinancing](https://money.com/best-mortgage-refinance/) your existing mortgage, there are different types of loans available to help you finance a property. Both the lender and the type of loan you choose will determine the credit score, [debt-to-income ratio](#dti) (DTI) and down payment you’ll need to qualify. The loan type will also determine whether or not you need to pay mortgage insurance. Here are some general steps you can take to improve your chances of qualifying for the home loan you want. ### Step 1: Work on your credit As a prospective homebuyer, your [credit score](https://money.com/what-is-a-credit-score/) and credit history play an important role in determining the mortgage loan type, interest rate and loan amount you can qualify for. [Mortgage lenders](https://money.com/best-mortgage-lenders/) use your credit score to determine your creditworthiness, which is your ability to repay debts. And the credit score you'll need to qualify for a mortgage will depend on the type of loan you're looking to get. #### Loan types of credit score requirements Loans insured by the government, such as [VA loans](https://money.com/what-is-a-va-loan/), [USDA loans](https://money.com/usda-loans-coronavirus-suburbs/) and [FHA loans](https://money.com/what-is-an-fha-loan/), tend to have more flexible qualification requirements than conventional mortgage loans, which are not government-backed. To get approved for a mortgage, whether conventional or government-backed, you’ll have to meet your lender’s minimum FICO score for that particular loan type. Generally, lenders require fair to excellent FICO scores, which range from 580 to 850.
Type of LoanMinimum FICO Score
Conventional620
Jumbo660
FHA580
VA580 (depends on the lender)
USDA640 (depends on the lender)
#### Developing credit history and improving your score [Improving your credit](https://money.com/7-ways-to-improve-credit-score/#:~:text=Your%20credit%20score%20is%20a%20representation%20of%20how%20creditworthy%20you,Good%20by%20both%20scoring%20companies.) pays off, as you could qualify for a lower interest rate with a good or excellent score. If you have bad credit or insufficient credit history, your options will likely be limited. If you're building credit from scratch, Experian recommends opening a credit account that reports to the [major credit bureaus](https://money.com/what-are-credit-reporting-agencies/) — like a [secured credit card](https://money.com/build-credit-with-secured-credit-card/) — maintaining a low credit utilization ratio and paying your bills on time. On that last point, keep in mind that late payments hurt your credit score significantly. Generally, creditors report late payments to the major credit bureaus when they are 30 days overdue. And once a late payment is on your credit report, it can stay there for up to seven years. #### Checking your credit report and score Experts also recommend checking your credit reports regularly to make sure they don't contain incorrect items or signs of fraudulent activity that could be affecting your credit. You won't find your credit score in your [free annual credit reports](https://www.annualcreditreport.com/index.action), but your credit card company might offer free score updates. For more tips on how to boost your credit score, read our guide on [how to remove negative items from your credit report](https://money.com/get-items-removed-from-credit-report/). ### Step 2: Save up for a down payment What you put down on the house can influence the type of loan you can get, as well as your interest rate and loan-to-value (LTV) ratio — the loan amount divided by the current value of the home. How large a down payment you will need to make is subject to the type of mortgage you choose and the property you're buying. Lenders may require a different down payment for an investment property than a primary residence, for example. And mortgages like VA and USDA loans don't always require a down payment but an upfront [funding fee](https://money.com/what-is-va-funding-fee/) instead. #### Benefits if a higher down payment Most homeowners provide a down payment ranging from 3% to 20% of the home's purchase price. The higher your down payment, the lower your LTV. Some benefits of providing a higher down payment include lowering your interest rate and monthly payments and reducing your debt-to-income ratio. With conventional loans, you can also avoid mortgage insurance by putting 20% down. However, if you put less than 20% down, you’ll generally have to pay mortgage insurance until you reach 80% in equity. #### Tips to save for a down payment You can save up for a down payment by reducing your credit card debt, lowering your expenses and setting up a [high yield savings account](https://money.com/best-high-yield-savings-accounts/), [money market account](https://money.com/best-money-market-accounts/) or similar savings vehicle. Additionally, most states offer [down payment assistance](https://www.hud.gov/program_offices/administration/grants/grantssrc) for first-time homebuyers. ### Step 3: Lower your debt If you have [student loan debt](https://money.com/student-loan-debt-credit-score/) or credit card debt, you likely have a high debt-to-income ratio. Lenders use your DTI to gauge your ability to afford a mortgage in addition to existing expenses. Most lenders will require a [DTI ratio of less than 43 %](https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/), but this will depend on the type of loan you're applying for. In general, a [DTI of 35% is considered excellent](https://themortgagereports.com/74854/good-debt-to-income-ratio-for-mortgage). To determine your DTI, lenders take into account your front-end and back-end DTI. #### Front-end DTI Your front-end ratio consists of your monthly housing expenses divided by your monthly gross income. Housing-related expenses include your future mortgage payment, taxes and mortgage insurance. #### Back-end DTI The back-end DTI is the percentage of your gross income spent on monthly debts. The items detailed in your credit report often comprise your back-end DTI. This includes monthly obligations such as credit cards, car loans, student loans, child support and personal loans. Other items such as utility costs, your savings account contributions and 401(k) or [Roth IRA](https://money.com/what-is-a-roth-ira/#:~:text=A%20Roth%20IRA%20is%20an,and%20penalties%20on%20your%20earnings.) savings are not factored into your back-end DTI. #### Lowering your DTI You will need to pay off some of your debts entirely or increase your income to lower your DTI. You can also consider [debt consolidation](https://money.com/understanding-debt-consolidation/), which would bundle your existing debts into one monthly payment. Debt consolidation is worth considering if it reduces your interest rate, as that can help you save money in the long run. Find out what your DTI is with our [debt-to-income calculator](https://money.com/debt-income-ratio-calculator/). If your DTI is high, work to pay down some of your debt before applying for a mortgage. This will increase your chances of approval. ### Step 4: Get pre-approved Prequalification and [pre-approval](https://money.com/how-to-get-preapproved-for-a-home-loan/) refer to a letter from a lender specifying how much they are willing to lend you for the purchase of a home. - **Prequalification:** gives you a general idea of [how much house you can afford](https://money.com/how-much-house-can-i-afford/#:~:text=A%20standard%20today%20is%20the,of%20your%20other%20debt%20obligations.) using self-reported information about your income and credit. - **Pre-approval:** entails a hard credit inquiry, which means the lender will verify your credit, income, employment, assets and debt. Pre-approval letters are often valid for up to 90 days. Many sellers and real estate agents won’t consider an offer from a borrower that doesn't have a pre-approval letter — especially when demand and competition are high. If you’re worried that your credit score will suffer after getting pre-approved by several lenders, there’s no need. Multiple hard credit inquiries for auto or home loans within a certain period (usually 14-45 days) count as one, so the hit to your credit will be minimal. Documents commonly required to get pre-approved include: - Pay stubs and other employment documents like tax returns, W-2s and 1099s - Bank, retirement and investment account statements - Loan statements (auto, student, or real-estate loans) - Bankruptcy and foreclosure records - Evidence of divorce, if applicable - Copy of former rental payments ### Step 5: Calculate closing costs Closing costs vary depending on your state, loan type and mortgage lender. However, you can expect to pay up between 2% and 5% of the home purchase price in closing costs.
Closing costs generally include:
Appraisal feeThe appraisal determines the value of the home. It costs between 300 and $500.
Home inspectionInspections ensure the property is structurally sound and habitable. They can cost from 300 to over $500.
Escrow feesAn escrow account is set up to hold your good faith deposit until closing. After closing, you may be required to add funds to the account to cover property taxes and home insurance.
Property taxThe city or county may charge a fee for certifying you have paid your property taxes.
Flood certificationCharged to determine whether the property is located in a flood hazard area.
Application feeCharged for processing and underwriting the loan. This is a non-refundable fee.
Origination feeCharged by the lender for setting up a new loan. This can cost from 0.5 to 1% of the loan amount.
Mortgage pointsAlso known as discount points, these allow you to pay more upfront to get a lower interest rate. One point costs 1% of the total loan amount.
Private mortgage insuranceInsurance to protect the lender from losses; typically required from borrowers whose down payment is less than 20%.
Credit report feeThe cost of a credit report detailing your credit history. Generally $30 to $50.
Document preparation feeThe cost of preparing legal closing documents
Homeowners insuranceProtects the lender and the borrower against physical damage to the home. Homeowners insurance costs vary by property type, location and coverage amount.
Title search reportCharged by a title company that goes over the property history to ensure the title is clear of liens.
Prepaid interestInterest that accrues from the time the loan is closed to the first mortgage payment.
### Step 6: Factor in mortgage insurance #### Private mortgage insurance (PMI) When purchasing a property with a conventional loan, some buyers have to factor in private [mortgage insurance](https://money.com/what-is-mortgage-insurance/) (PMI). PMI is generally required for homebuyers who offer less than 20% down and is designed to protect the lender if you default on your loan. The cost of PMI is rolled into your mortgage payment as an added fee and often accounts for 0.2% to 2% of the mortgage amount. According to [Freddie Mac](https://myhome.freddiemac.com/buying/breaking-down-pmi.html), you can expect to pay between $30 to $70 per month for every $100,000 borrowed. Once you build your equity to 20% of the property's appraised value, your loan servicer is required to drop PMI. According to Freddie Mac, PMI will automatically terminate on the date your principal balance reaches 78% of the original appraised value of your home. #### Mortgage insurance premiums (MIP) Government-backed loans don’t have PMI. Instead, you’ll have to factor in mortgage insurance premiums, which are paid both at closing and as part of your monthly payment. Both FHA and USDA loans require mortgage insurance. FHA loans require an upfront premium of 1.75% of the loan amount. FHA borrowers also pay an annual premium of 0.45% to 1.05% of the loan amount — unless they put 10% down. Some FHA borrowers can remove MIP, but that will depend on their loan's origination date. On the other hand, USDA loans require an upfront mortgage premium of 1% and an annual premium of 0.35%. The drawback of USDA loans is that there’s no way to eliminate your mortgage insurance premium. If you have a VA loan, the VA guarantee replaces mortgage insurance. However, you’ll still have to pay an upfront funding fee of 1.4% to 3.6% of the loan amount at closing. If you don’t have the money upfront, VA, FHA and USDA loans allow you to roll the fee into your mortgage, but your loan amount and overall loan cost will increase. ### Step 7: Shop for rates To [get the lowest mortgage rate,](https://money.com/get-the-lowest-mortgage-rate/) compare offers from several lenders to get the best deal. According to [Freddie Mac](http://www.freddiemac.com/research/insight/20180417_consumers_leaving_money.page), comparing one additional lender can save you around $1,500 over the life of your loan and an estimated $3,000 for comparing five quotes. To compare rates, get pre-approved with different banks and credit unions, making sure you're looking at the same loan type and amount across lenders. And don't forget to compare fees. Mortgage lenders should be able to provide you a list of applicable fees and closing costs. ## Mortgage qualification FAQ ### What is the lowest credit score to buy a house? Government-backed loans tend to have more flexible credit score requirements than conventional loans. The minimum credit score for government-backed VA, FHA and USDA loans begins at around 580. If you have a lower credit score, developing a credit history can boost your chances of qualifying for a loan if you don't meet the required minimum set by your financial institution. ### What is the minimum down payment on a mortgage? Some types of mortgage loans don't require a down payment in order to qualify, such as VA and USDA loans. Instead, they require a one-time upfront payment of 1% to 3% of the loan amount — depending on the loan. However, most U.S. borrowers opt for conventional loans. In this case, the minimum down payment for conventional loans starts at 3%. ### How to get a mortgage with no credit history Although it may be challenging, you can still qualify for a mortgage if you haven't built up sufficient credit history. Having no credit history means that you've never borrowed money before and don't have a credit score. If you have little or no credit established, consider an FHA loan. These loans are designed to help borrowers that may not meet eligibility requirements for a conventional loan, including those with no credit history. Some mortgage lenders also take into account nontraditional credit history, meaning they evaluate things such as your payment history. Other lenders may require a cosigner to approve your loan. ### How to get a mortgage when you're self-employed In order to qualify for a mortgage as a self-employed borrower, you'll have to provide evidence of a steady income stream spanning at least two years. Evidence of gross monthly income can include tax returns and pay stubs, for example. Lenders will also evaluate your bank statements, credit score and loan-to-value ratio. Having a good credit score of at least 740, offering a down payment between 15%-20% of the purchase price, and having a DTI under 43% can tip the scale in your favor. Finally, if you have a partner with a full-time job and W-2, you can improve your chances of qualifying by having them co-sign the loan with you. ## Summary of Money's guide to mortgage qualification The type of loan you choose will determine the minimum requirements needed to qualify.
Loan TypeDown PaymentCredit ScoreDTI RatioMortgage Insurance
Conventional Loans3%-20%62043%PMI required for down payments of less than 20%. Depends on loan type, credit score and down payment.
Jumbo Loans20%-40%660 and above45%Depends on loan amount and down payment.
VA LoansNot requiredVaries by lender60%No mortgage insurance but a one-time funding fee (1.25%-3.3% of the loan amount).
FHA Loans3.5%58057%Mortgage insurance required. MIP can be removed after 11 years if you put down 10%.
USDA LoansNot required64041%No mortgage insurance, but a one-time guarantee fee (1% of loan amount) and an annual fee (0.35% of loan amount).
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