Qualifying for a Mortgage? It’s Not as Difficult as You Might Think

Written by
Kirk Haverkamp
Read Time: 6 minutes

What's keeping you from applying for a mortgage? Maybe you're worried that your three-digit credit score isn't high enough or that you have too much debt. Maybe you're worried 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 recent study by Fannie Mae found that most people think that the requirements for getting a mortgage are more stringent than they actually are. According to the study, the financial requirements set by mortgage lenders aren't nearly as hard to meet as borrowers think.

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

Perfection? It’s not necessary

Tammi Lindley, co-founder of the Tammi Lindley Team at Portland, Oregon-based Mortgage Express, said that it's not unusual for borrowers to worry that they won't qualify for a mortgage, especially if they have never applied for mortgage financing before.

The truth, though, is that borrowers don't need perfect credit or a sky-high income to qualify for a home loan, Lindley said.

"There are many loan programs available to borrowers with less-than-perfect credit and with little or no down payment savings," Lindley said. "There are many loan programs available. Some of them are less 'FICO sensitive' than others."

According to Fannie Mae’s study, though, not everyone has gotten this message.

Those mortgage requirements aren’t so stringent

Fannie Mae's Economic and Strategic Research team in 2018 studied the misconceptions consumers had about applying for a mortgage loan. The researchers discovered that consumers didn't understand the basic thresholds they had to meet to qualify for a mortgage.

In short, consumers overestimated the credit score, down payment and debt-to-income ratios they needed to earn a mortgage approval.

Consider credit scores. When Fannie Mae researchers asked consumers what FICO credit score they needed to qualify for a mortgage, the median answer they gave was 650. But consumers can qualify for an FHA loan with a credit score of just 580.

Researchers also asked consumers the minimum down payment that they'd need to provide when buying a home. The median answer respondents gave was 10 percent of a home's final sales price. As Fannie Mae says, this again is higher than what consumers actually need, with many mortgage programs requiring down payments as low as 3 percent of a home's purchase price.

Fannie Mae also asked about the debt-to-income ratio that home buyers need. The median response from survey participants was 40 percent, meaning that they thought lenders would only approve their loan applications if their total monthly debts, including their new mortgage payments, equaled no more than 40 percent of their gross monthly income. But, as Fannie Mae says, lenders today want borrowers' monthly debts to equal no more than 50 percent of their gross monthly income.

So, what are the requirements for a home loan?

Borrowers, then, overestimate what they need to qualify for a mortgage. That begs the question: What do you really need to qualify for a home loan?

John Dustman, senior vice president of consumer direct lending at San Diego-based online mortgage lender Axos Bank, said that consumers must show a history of paying their bills on time and prove that they have enough income to afford their monthly payments.

There is no one credit score that borrowers must hit. But know that the higher your score, the better your odds of not only qualifying for a mortgage but landing a home loan with a lower mortgage rate. A rule of thumb is that a FICO score of 740 or higher is considered a strong one by lenders.

Fortunately, building a good credit score isn't complicated, either. Basically, you need to pay your bills on time and not run up too much credit card debt.

"Payment history plays a big factor in determining each individual's score," Dustman said. "It's important to make your payments on time and to not have late payments reported on your credit."

A single late payment on certain bills, such as your credit card, auto loan, student loan or mortgage, could cause your credit score to fall by 100 points. Just remember, a payment isn't reported to the three credit bureaus of Experian, Equifax or TransUnion as officially late until it's at least 30 days past the due date. If you are two weeks late on paying your credit card, then, make that payment today to avoid a hit to your credit score.

Dustman also points to capacity, or your ability to afford a monthly mortgage payment, as another key. As Dustman says, you'll need to provide proof that your income is high enough to repay your mortgage debt, usually in the form of copies of bank statements, income tax returns and paycheck stubs.

Dustman recommends that consumers aim for a debt-to-income ratio of 32 percent to 45 percent -- even though the Fannie Mae study said that lenders will accept a median ratio of 50 percent -- to increase their odds of qualifying for a mortgage.

Lenders will also look at the cash you have available, Dustman said. They want to see how many months you could make your mortgage payments if your income stream was unexpectedly cut off. Dustman said that the more money you have available after closing your mortgage, the better.

"Borrowers with more than six months of cash reserves after closing are considered to have a higher level of capacity to repay the loan than someone who has one month of reserves," Dustman said.

Down payments don’t have to be high

Chris Mason, owner of America's Home Loans in Petaluma, California, said that the biggest misconception borrowers have is that they need a down payment of 20 percent of a home's purchase price to get a mortgage. This isn't true, he said.

And that's fortunate. Coming up with such a large down payment could be expensive depending on where you live. Mason, for example, lends plenty of money to borrowers in the San Francisco region, where prices are high. Many buyers here need lower down payment requirements to get into homes.

"It is true that more down leads to better financing," Mason said. "But 20 percent down is unusual in San Francisco because of the high starter home prices."

There are plenty of options for consumers who either don’t want to come up with or don’t have that 20 percent down payment. Borrowers with a credit score of 580 or higher can qualify for an FHA loan with a down payment of 3.5 percent. Both Freddie Mac and Fannie Mae offer 3 percent down payment programs. And it’s not unusual for private mortgage lenders to approve borrowers for loans that require down payments as low as 5 percent.

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