Once you’re ready to become a homeowner, it’s time to start the process of securing a mortgage. Careful planning is required, so it’s important to know how mortgage qualification works.
Though getting approved for a mortgage can be complex, there are some basic steps you should follow. They won’t guarantee approval, but you’ll be much more prepared and confident about the homebuying process.
1. Calculate Your Debt-to-Income Ratio
One of the most important factors that mortgage lenders will consider is your debt-to-income ratio. It is generally expressed as a percentage, and represents how much of your income goes toward paying off debt each month.
Here’s an example: Say you earn $6,000 per month before taxes. You have a $500 student loan payment, $300 car payment, and $100 credit card payment due every month. That means you’re on the hook for $900 in monthly debt payments. If you divide $900 by your gross monthly income of $6,000, you get a DTI ratio of 15%.
Specific DTI ratio requirements depend on the type of loan you’re applying for, though they aren’t set in stone. The underwriting process for conventional loans — as well as loans backed by the Federal Housing Administration, Department of Veterans Affairs, and the Department of Agriculture — allows for higher DTI ratios in some cases. In fact, it’s possible for lenders to approve applicants with a DTI ratio of 45% to 50%.
Figure out where you stand with our DTI ratio calculator.
How to lower your DTI ratio
If you’re concerned that your DTI ratio is too high, how do you qualify for a mortgage? There are a few things you can do to lower your DTI ratio:
- Try to pay down some of your existing debt. This will reduce the amount you owe each month in relation to your earnings, which can give your mortgage application a boost. Of course, it’s easier said than done.
- Increase the amount you’re earning. You could ask for a raise at work or take on a side hustle. How you attempt to increase your income will depend on your job situation, lifestyle, and other considerations.
- Take all your income into consideration. Alimony and child support payments can factor into your regular income.
2. Improve Your Credit Score
Creditworthiness is an important factor when applying for a mortgage. It’s often measured by your credit score, a three-digit number that represents how trustworthy you are as a borrower. Though there are many different scoring models, lenders usually look at your FICO score. FICO scores are based on the information contained in your credit reports, such as account balances and payment history.
The higher the score, the better credit you have. If you want to know where you stand, some banks and credit card companies allow customers to get their monthly FICO scores at no additional cost.
It’s also a good idea to request your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. You can get free copies of your reports from AnnualCreditReport.com and review them for any errors that could be dragging down your score.
Credit score requirements can vary
The minimum credit score needed to get a mortgage varies depending on the loan type and lender.
For most conventional loans — i.e., mortgages that aren’t insured by the government — the minimum credit score is 620. A credit score above 740 allows you to qualify for the best interest rates and terms.
For other mortgages — such as FHA loans and VA loans — there aren’t official credit score requirements, but most lenders set their own minimums. For example, it’s possible to qualify for an FHA loan with a credit score of 500, as long as you meet additional requirements.
How to improve your credit score
While meeting the minimum credit score helps you qualify for a loan, your credit can also affect the interest rates you’re offered, how much you’re required to put down, and more.
If you want to improve your credit before applying for a mortgage, there are certain steps you can take:
- Pay your bills on time. Payment history makes up 35% of your FICO score, meaning it’s the most heavily weighted factor. Missing just one payment can knock many points off your score, while paying every bill in full and on time will help you build good credit.
- Pay off overdue debts. If you’ve missed payments in the past, paying off any past-due debts or accounts in collections can help improve your score. However, keep in mind that late payments can stay on your report for up to seven years.
- Reduce your outstanding debt. How much you owe in relation to the total amount of credit available to you is called your credit utilization ratio, and it makes up 30% of your score. It’s best to keep your credit utilization below 30% — the lower, the better.
- Build your credit history. At 15% of your credit score, your credit history is another important factor. If you don’t have much experience using credit — also known as having a thin credit file — you can ask to be added as an authorized user on the credit card account of a trusted family member or friend. This allows you to share that person’s positive credit history.
- Avoid applying for new credit. When you’re in the process of applying for a mortgage, it’s important to avoid making any new changes to your credit profile. That includes applying for other loans or credit cards, which will result in a hard credit inquiry on your report — a potential red flag to lenders.
- Dispute any errors. Incorrect information on your credit report can damage your credit score significantly. If you find mistakes on your credit history, reach out to the credit bureau to get those mistakes removed or corrected.
Note that companies promising to improve your credit score quickly or remove items from your report are almost certainly scams. It can take three to six months of active credit use to establish a score — and it’s something you can do yourself, for free.
3. Save For a Down Payment
When taking out a mortgage, you’ll usually need to pay some money upfront toward the cost of the home. This is known as the down payment.
With most loans, it’s possible to put down as little as 3%. Conventional loans, for example, usually require a 3% down payment at minimum, and FHA loans require at least 3.5% or more, depending on your credit score.
Other types of loans, such as VA loans and USDA loans, might not require you to put down any money at all if you meet certain criteria. Conversely, higher-risk loans, such as jumbo loans, may require you to put down more than 20% to be approved.
If you can afford to make a larger down payment, doing so means you’ll need to borrow less, and you can avoid the additional expense of private mortgage insurance. For conventional loans, you must pay PMI if you put less than 20% down, and you’ll continue paying it until you reach an 80% loan-to-value ratio — meaning you have 20% equity, or ownership, in your home.
How to save for a down payment
If you don’t have enough saved for a down payment yet, there are different ways you can boost your savings:
- Cut discretionary spending. It could be beneficial to review your budget and look for expenses that can be temporarily cut. This may include dining out, subscriptions, memberships, and other spending on other nonessentials.
- Automate your savings. By setting up a regularly occurring transfer from your paycheck or checking account to your savings, you won’t have to overthink the process of saving money.
- Look for down payment assistance programs. There are many government and nonprofit organizations that provide financial assistance to homebuyers for down payments and closing costs. To find out what programs you qualify for, start by looking up your state in the Department of Housing and Urban Development’s directory.
4. Gather the Necessary Documents
Once your finances are in order, it’s time to get ready for the actual application — and you might be asking yourself, “How much of a home loan do I qualify for?” Your lender will be able to tell you based on the information that you provide. This step involves gathering a large amount of paperwork, which can feel overwhelming, so it’s a good idea to prepare all the documentation as soon as possible.
Below is a breakdown of the common types of documents that your lender will request. Keep in mind that the mortgage application process varies by lender, so you may be asked to provide additional or different documentation.
Documentation of income
Be prepared to provide one to two months’ worth of pay stubs, as well as the past two years of tax returns. You might need to provide other documentation if you receive income from sources other than a traditional job, like if you’re self-employed or earning passive income from investments.
If your income fluctuates a lot or comes from many unconventional sources, you may need to opt for manual underwriting or a lender that specializes in working with nontraditional borrowers.
“A specialty lender is better equipped to deal with, for example, a self-employed social media influencer whose income varies from month to month or someone whose primary income comes from stock options,” says Tabitha Mazzara, director of operations at MBANC, a mortgage lender based in Manhattan Beach, California. “We do a more in-depth analysis of your investments, bank statements, and whatever it takes to get a thorough understanding of the big picture of your finances.”
Common documents used to prove income include:
- Pay stubs.
- Federal or state tax returns.
- Wage or income tax documents, such as W-2s or 1099s.
- Self-employment documentation, such as recent profit and loss statements.
- Social Security benefit letters.
Documentation of assets
In addition to sufficient and stable income, lenders also want to know that you have enough money in reserve. You’ll need to provide a list of assets, which are anything of value that can be converted into cash — such as stocks, bonds, vehicles, and so on.
Documentation for your assets also may include three to six months of bank account statements — including checking, savings, certificate of deposit, and money market accounts — as well as statements for retirement accounts such as a 401(k) or an individual retirement account.
Most lenders will accept the following documents for proof of assets:
- Bank statements.
- Investment account statements.
- Proof of purchase.
- Verification letter from a third-party verification provider.
There could be other areas of your financial situation that you’ll need to verify. Some examples of documents you might want to provide include:
- A paper trail for the source of recent large deposits, such as checks or bank statements.
- A letter from anyone giving a financial gift, stating where the funds came from and confirming it was not a loan.
5. Understand the Minimum Requirements for Your Loan
When shopping around for a mortgage, you’ll find that every lender has its own standards for loan approval. However, there are some basic requirements that apply to different types of mortgages.
Below is a closer look at some of the main loan types and the minimum requirements to qualify:
Mortgage Types and Requirements
|Minimum down payment
|3%, or 20% to avoid PMI
|3.5% with a 580-plus credit score, or 10% with a credit score between 500 and 579
|0% for qualifying borrowers
|10%, or 20% to avoid PMI (can vary by lender)
|Minimum credit score
|None (up to lender)
|None (640 is recommended)
|680 (can vary by lender)
|Closing costs (can vary by lender)
|Upfront mortgage insurance premium of up to 1.75%, annual premium of up to 1.05%, and closing costs
|One-time VA funding fee of 1.65% to 3.6%, plus closing costs
|Upfront guarantee fee of up to 3.5%, annual fee of up to 0.5%, and closing costs
|Maximum DTI ratio
|41%, or additional requirements if higher
|45% (can vary by lender)
Keep in mind that there are many factors at play, so you might not qualify for a loan or the best interest rates even if you meet the minimum requirements. Before applying, be sure to ask your lender about their eligibility requirements.
Note that the Fair Housing Act prohibits lenders from discriminating against borrowers based on race or color, religion, national origin, sex, familial status, or disability. If you believe you’ve been a target of discrimination, you can file a complaint with the HUD.
6. Compare Different Mortgage Lenders
When applying for a mortgage, it’s important to shop around for the best offer from a reputable lender. That means getting quotes from different lenders to compare interest rates, terms, and fees.
When choosing a lender, consider the following factors:
- Type of lender. Many different financial institutions provide mortgages. For example, you can choose a major bank, which can be a quick and convenient option. However, if you have a relationship with a community bank or credit union, you may receive personalized service and be more likely to get approved.
- Mortgage rates. The interest rate you pay on your loan will make a big difference in the total cost. Even half of a percentage point can equal thousands of dollars spent or saved over several years. It’s also important to know if the loan is a fixed or adjustable-rate mortgage, which can change the size of your payments in the future.
- Loan requirements. Again, every mortgage lender is different, so you’ll want to consider the requirements set by each lender — including the minimum down payment, the minimum credit score, and other factors that will influence your ability to get the best deal possible.
- The fine print. Watch out for certain conditions that might be attached to the loan, such as prepayment penalties, extra fees, or how long the interest rate will be locked in. Be sure to go through all the details of the contract before agreeing to anything, and ask questions.
- Types of loans offered. Not every lender is approved to provide every type of loan. For example, if you want an FHA loan, you’ll need to work with an FHA-approved lender. If you’re borrowing beyond the conforming loan limits, you’ll need to find a lender that specializes in jumbo loans.
You can use a mortgage calculator to crunch the numbers on different types of loans. Once you’ve found the right lender for you, you can go ahead and apply for a mortgage.
7. Get Preapproved
Now that you’ve selected the type of mortgage you want, it’s time to seek mortgage preapproval. The lender will check your credit and ask for documentation of your income and existing debts.
If you get preapproved, you’ll receive a letter outlining how much you can borrow and the interest rate you can expect. The preapproval letter is good for 60 to 90 days.
Getting preapproved is essential for a few reasons. One is that you’ll understand what type of loan you’ll likely qualify for, which will inform your homebuying budget. It also will show sellers that you are serious about buying a home and can back up any offers you make.
If you continue with the same lender that preapproved you, it can speed up the application process because you’ve already provided the lender with some of the necessary information.
8. Submit Your Mortgage Application
Once the seller accepts your offer, you can submit the final mortgage application. Applications can either be done in person, over the phone, or online.
The lender may ask for some additional documents to finalize your application before underwriting begins. If you’re preapproved, you’ve already done a lot of the preparation by finding a lender and providing financial information.
9. Begin the Underwriting Process
Mortgage underwriting is the process where the lender reviews every detail of your loan application to decide whether to approve your loan. Underwriting for a home loan can take weeks, so it’s important to be patient throughout the process. During this time, be ready to answer any questions the lender has and provide any documents the lender asks for.
During underwriting, the lender will likely schedule a home appraisal to ensure the home is worth enough to serve as collateral for the loan. Lenders also may require you to buy homeowners insurance and title insurance.
10. Close On Your Loan
If the lender approves your application, it’s time to close. At closing, you’ll get one last chance to review all the paperwork and legal documents before you sign and accept your loan.
The closing disclosure is an important document that summarizes the key details of the loan. Take your time to review all the documents and bring along a trusted advisor or real estate agent if you feel the need to. Once you sign the paperwork, the new mortgage is yours.
FAQ: How To Get a Mortgage
Here are the answers to some frequently asked questions about how to get a mortgage.
There isn’t a minimum income requirement for getting a mortgage. However, you need to prove that you have sufficient income to repay the loan and meet DTI ratio requirements.
For most loans, the DTI ratio limit is between 36% and 45%, which means if you have no other debt, your monthly mortgage payment must be less than 45% of your monthly income. For example, if you want to get a mortgage with a $500 monthly payment, you’ll need a monthly income of at least $1,112.
How much house $2,000 a month buys depends on a few factors. The most important will be the size of your down payment, the mortgage interest rate, and the loan term.
For example, a 30-year loan at a 7% interest rate for $300,000 would have a monthly payment just under $2,000. If you have a 20% down payment, that means you can buy a $360,000 home. If your down payment is 5%, then you can only buy a home worth $315,000.
Some lenders and other companies will send advertisements in the mail to encourage people to apply for mortgages or other types of home loan products, such as home equity loans. Some may use misleading images or wording to make you believe they’re from a government source. It’s important to review these offers carefully and read the fine print to make sure they are from legitimate lenders and do not have predatory fees or interest rates.
The Bottom Line on Qualifying For a Mortgage
The process of applying for a mortgage and securing financing might seem intimidating, but breaking the process down into 10 steps can minimize stress. By arming yourself with knowledge of the mortgage application process and taking time to prepare, you can lay the groundwork to get a mortgage for your new home.
T.J. Porter contributed to the reporting for this article.