When researching the various loan options you can use to help purchase your dream home, you'll come across several criteria that lenders use to determine your housing loan eligibility. The home loan eligibility criteria will range from specific credit score as documented by your credit report and down payment requirements to guidelines for net monthly income and loan amounts, these criteria can vary both by the lender and the loan program. Further, flexibility can exist for certain borrowers such as salaried individuals or those with a co-applicant with excellent credit.
In any case, lenders want to see you meet these requirements because doing so helps reduce the risk they take on when they give you a loan. Use this home loan eligibility guide to get your FAQs answered.
Read More: Where to Start When Buying a House
Basics of Home Loan Eligibility
Home loan eligibility comes down to whether the property you're buying satisfies the requirements for your specific mortgage program and whether your financials show that you're a good risk to the lender and fulfill any specific requirements for the mortgage program. Property eligibility can include factors such as the type of property, its intended use, its value and even its location. Borrower eligibility can include a suitable credit score, stable employment with a sufficient income, satisfactory debt-to-income (DTI) ratio and the ability to make a down payment and pay other associated costs.
In the end, the lender wants to make sure that you can not only afford the expenses you'll incur during the purchase and closing processes but also handle the equated monthly installment (EMI) of principal and interest on the loan as well as other monthly costs associated with the mortgage. This means you can expect the lender to look at your current money saved and use information such as your recurring income and debts to assess what you can afford to pay monthly. The eligibility screening is crucial since you won't want to go into foreclosure if you get over your head with a high mortgage payment, and the lender doesn't want to risk losing money either.
Minimum Credit Score Requirements
Checking your credit score helps lenders determine your eligibility for different loan programs and gives them a picture of your creditworthiness so they can decide if you'd make a responsible borrower. Further, your credit score plays a role in your interest rate, so maintaining good credit can save you significantly in the long run. Your score will be somewhere between 300 and 850, and your current balances on car loans and credit cards, credit history length, mix of credit accounts, new credit applications and long-term payment history all contribute to the rate of interest. Your loan repayment history for personal loans will also be a factor.
If you apply for a conventional mortgage or Veterans Affairs (VA) loan, you can expect to need a minimum credit score of 620 unless the lender sets a higher number. Eligibility for a Federal Housing Administration (FHA) loan starts with a credit score of 500, while a U.S. Department of Agriculture (USDA) loan usually needs a 640 credit score. A jumbo loan for high-value properties often warrants a credit score of 700 or higher.
Read More: What Credit Score Do I Need for a Mortgage?
Employment and Income Requirements
Regardless of the mortgage program you seek, lenders will make sure you have stable cash inflows and get enough money to make your mortgage payment out of your take-homepay. Whether you're a salaried employee, retiree or close to retirement age or self-employed borrower, you can expect to show a reliable income on your application form for at least the past two years. You should have documents like payslips, W-2 forms in your full name, income tax returns (itr), 1099-NECs for the self-employed or bank statements that prove the income as ongoing and stable.
You must also fulfill any income limits that apply to your mortgage program. USDA loans and certain conventional programs, like Home Possible® from Freddie Mac and HomeReady® from Fannie Mae, have income ceilings, so making more than those limits means you aren't eligible.
Maximum DTI Ratios
Tying in with your income, your DTI ratio provides lenders with a picture of how much of your earnings go toward monthly debts. This calculation thus helps with assessing if you can handle the extra obligation of a mortgage - also known at the emi amount.
There are two versions and lenders often use both in their eligibility screening. The first is a front-end DTI ratio where the lender takes your monthly house payment (plus extras like homeowner's association fees) and divides it by your monthly income. The second is the back-end DTI ratio that considers all monthly debts and existing loans and divides them by the monthly income.
A common rule is to not let your front-end DTI ratio exceed 28 percent or the back-end DTI ratio exceed 43 percent, but the actual numbers vary by mortgage program as well as your compensating factors. For example, typical back-end ratios include 45 percent for conventional loans, 41 percent for VA and USDA mortgages and 43 percent for FHA loans, but having high cash reserves may allow for a higher limit. This in turn may mean a higher loan amount. Typical front-end DTI ratios include 31 percent for FHA mortgages and 29 percent for USDA loans.
Minimum Down Payment
The money you can afford to pay out of pocket toward your new home affects your eligibility for certain mortgage programs, as some will require a minimum down payment. Further, the down payment can mean the difference between having to pay for private mortgage insurance (PMI) for conventional loans as well as affect the interest rate you pay. Going beyond the minimum down payment can help lower your interest rate and make your monthly loan payment smaller.
While you can get a conventional loan with 3 percent down, making a 20 percent down payment eliminates the PMI requirement. USDA and VA loans don't require any money down for most borrowers, but have PMI alternatives like a funding or guarantee fee all borrowers must pay. FHA loans come with a credit score-based down payment that is 3.5 percent with a 580+ score and 10 percent with a 500-579 score, and all borrowers have mortgage insurance. Jumbo loans usually require at least 10 percent down.
Not having the minimum down payment, however, doesn't mean automatic disapproval since you can find assistance programs to help with the cost. Further, lenders often allow you to receive gifted down payment funds without impacting your home loan interest rate.
Read More: What Is a Home Down Payment?
Other Cash Reserve Needs
When your mortgage gets finalized after a home purchase, you need to have enough money for closing costs, which are based on the loan amount and can range from 2 to 6 percent. Along with using your own money for closing costs, you have several options, such as finding a lender that waives some fees or lets you roll them into your mortgage, getting the seller to pay some of them or seeking an assistance program or gifted funds.
Also, lenders may look for a minimum amount of extra cash reserves to have the assurance that an emergency wouldn't make you automatically unable to pay the mortgage. For example, a lender giving you a conventional loan may look for six months of mortgage payments saved, while you might not need a certain amount for government-backed programs unless you have a lower credit score or less stable income situation. The extra cash reserves can come in handy if you're slightly over the DTI ratio maximum for your chosen loan program and may lead to more lenience for approval with less hassle in meeting your housing finance needs.
Limits on the Loan Amount
The different mortgage programs for a single-family home often come with maximum loan amounts that depend on the county where your new home is located. You can make a down payment big enough to lower the loan needed to avoid issues in this area when needed.
The loan limits range from $484,350 to $726,525 for conventional loans. After those cutoffs, you'd need to consider the jumbo loan option. In counties where USDA loans are available, the maximum home loan amount is usually at least $285,000, while FHA loan limits range from $356,362 to $822,375. VA loan borrowers with a full entitlement don't have a loan amount limit, while other borrowers will face limits that vary by county.
Further, the property will usually need to appraise for at least the loan amount for a lender to let you borrow the money. An appraisal occurs during the home buying process for this purpose, and issues with the value can lead to needing to work things out with the seller or deciding to pay the difference to proceed.
Other Factors for Loan Eligibility
Loan programs often come with restrictions on the types of properties that qualify. For example, USDA loans work just for rural properties, while homes backed by programs such as FHA and VA loans need to meet certain safety and structural standards. If you seek a loan for a mobile home, you can run into other restrictions like the home needing to have certain characteristics, like residing permanently on an owned lot. Most mortgage programs offer flexibility to buy different properties such as condos and single-family homes.
Another common factor for loan eligibility involves how you reside in the home. FHA, VA and USDA loans require that you use it as a primary residence for at least a certain period of time during the loan tenure. On the other hand, conventional and jumbo loans allow for purchasing properties you could also use as an investment or vacation home.
Personal affiliations and characteristics can also matter. In the case of VA loans, eligibility also depends on one's status in the military or as a spouse of someone who served. Someone who lacks enough service time or who had a dishonorable discharge, for example, would not be eligible for this type of loan. The current age of any mortgage borrower needs to be the minimum age of 18 that usually applies to loans, but there's usually no upper age limit for those with repayment capacity.
Read More: Where Do I Get Mobile Home Financing?
Options for Boosting Eligibility Chances
By assessing where you might fall short of approval, you can take some direct steps to boost eligibility. For example, if you find a high DTI ratio is a problem, you might do a balance transfer of high-interest debt to reduce interest and pay off the amount sooner. Or if your credit score is low, you might need to wait until you can rebuild your credit or cut some debt. When the upfront funds are the problem, you might look for assistance programs, ask for gifted funds or apply to local assistance programs in your area.
You can also consider a co-borrower who can help you become eligible. This can help if you need to lower your DTI ratio since the co-borrower's income is considered, but keep in mind that their debts will be considered, too. This option may not help if your credit score is too low for eligibility, since while the lender would consider both scores, the lower one usually takes precedence in the decision.
Read More: Alternative to Cosigning a Mortgage
Getting an Eligibility Assessment
You have a few routes to consider if you're curious about how big of a home loan you might qualify for or whether you meet the criteria at all. The best option will depend on where you are in the home buying process as well as whether you'd like an official answer and help from a professional.
The less formal option involves going online and looking for a home loan eligibility calculator that will ask you several questions and thus requires some research beforehand. Things to have ready include your annual income, estimated credit score, down payment amount saved, typical monthly debt payments and figures for the mortgage interest rate and term. When you enter all this data into the home loan eligibility calculator, it gives you amounts for the likely approved home loan amount and mortgage payment.
Only a lender at a financial institution or mortgage brokerage can assess your eligibility for different loan options through a pre-approval process that requires a lot of the same information as a calculator would. However, a lender checks your current credit score and asks for documents that back up your cash reserves and income during this step. Going through this process can offer reassurance and provides an opportunity to shop with different lenders, find out how much of a loan you can get and compare interest rate offers. Your lender can also offer advice on shortcomings you might have for mortgage eligibility. By taking the time to do this, you also will not run into any disclaimers when it's time to sign.
Alternative Mortgage Options to Consider
If you don't meet the mortgage requirements and don't expect you'll be able to meet them by taking other measures, you might consider options such as seller refinancing and non-qualified mortgages.
Best for temporary situations, seller financing usually involves the property owner lending you money and charging you mortgage payments for a set number of years before requiring the remaining balance as a balloon payment. You'd usually attempt to get a regular mortgage to cover the balloon payment when it's due, so you'd need to eventually meet the lender's criteria.
Non-qualified mortgages allow for lower credit scores, higher DTI ratios and less stable income situations in exchange for downsides like a higher interest rate and higher down payment. Self-employed individuals and investors might seek these loans when they can't show a regular income, have a high level of debt or need to work on their credit score.
Read More: What Is Home Finance by Owner?
- Consumer Financial Protection Bureau: What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?
- Consumer Financial Protection Bureau: What Is a Qualified Mortgage?
- Consumer Financial Protection Bureau: Buying a Home? The First Step Is to Check Your Credit
- Consumer Financial Protection Bureau: What Are Some of the Financial Considerations When Thinking About Buying or Renting a Home?
- Consumer Financial Protection Bureau: What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?
- Lending Tree: Minimum Mortgage Requirements for 2021
- Consumer Financial Protection Bureau: What Is a Jumbo Loan?
- U.S. Department of Agriculture: Rural Development Single Family Housing - Area Loan Limits
- U.S. Department of Housing and Urban Development: Maximum Mortgage Limits 2021
- Consumer Financial Protection Bureau: How to Decide How Much to Spend On Your Down Payment
- U.S. Department of Agriculture: Single Family Housing Guaranteed Loan Program
- U.S. Department of Veterans Affairs: VA Guaranteed Loan
- U.S. Department of Veterans Affairs: VA Home Loan Limits
- U.S. Department of Housing and Urban Development: Financing Manufactured (Mobile) Homes
- Consumer Financial Protection Bureau: Get a Prequalification or Preapproval Letter
- First Heritage Mortgage: What Is a Non-Qualified Mortgage?
- Consumer Financial Protection Bureau: What Is "Seller Financing"?
- Consumer Financial Protection Bureau: Making the Move to Homeownership on Your Own or With Someone Else
- The Motley Fool: What Do You Need to Qualify for a Mortgage?
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.