Qualifying for a Home Loan in 2019: Requirements and Guidelines You Need to Know
Real Estate1) How much should I make as a down payment?
In the recent past, people used to think that a 20% down payment was necessary to qualify for a home loan or to have a reasonable mortgage payment. For the most part, this is no longer the case. There are many types of mortgage programs that allow low or no down payment options in some cases. You also don’t have to be a first-time homebuyer to qualify for these programs.
FHA loans are one of the most popular types of mortgages taken out in today’s market, primarily due to low down payment options and flexible qualification requirements. With no down payment assistance, you only need a minimum of 3.5% down payment. Many people think that FHA is strictly for first-time homebuyers, but that’s not true. It’s a government-backed mortgage loan, but they don’t require you to be a first-time homebuyer. FHA stands for Federal Housing Administration.
Conventional loans have gained a lot of traction in recent years and will soon replace the FHA loan program as the most popular loan product on the market. Conventional loans allow for a minimum down payment of up to 3% and also allow for several creative ways to purchase monthly PMI (Private Mortgage Insurance). This strategy helps lower monthly payments while increasing your buying power.
Minimum down payment requirements for each type of loan below:
VA Loans: No Down Payment Required
USDA Loans – No Down Payment Required
FHA Loans: 3.5% minimum down payment required
Conventional loans: 3% minimum down payment required
You can use gift funds for any of the programs listed above. Also, if you’re a first-time homebuyer, be sure to ask your loan officer if you qualify for any down payment assistance programs.
2) What credit score do I need to qualify for a mortgage?
Aside from income verification, one of the biggest determining factors in qualifying for a mortgage is your credit score. The higher your credit score, the better your chances of qualifying. When a mortgage company or bank checks your credit for a mortgage application, they will get what is known as a triple merge. That’s when a credit report is combined with individual data and scores from the 3 major credit bureaus. Equifax, Experian and TransUnion. The mean of the 3 scores will be used to determine your qualifying score. Ideally, you want to have a median credit score of 680 or higher. In most cases, the higher your credit score, the better your rate and terms.
There are minimum credit score requirements for each loan program, but to ensure you qualify for the most competitive terms, it’s important that you do all you can to learn how to build and improve your credit.
Below are the minimum credit score requirements for each loan program:
VA Loans – 620 (some lenders may allow as little as 580+)
USDA Loans – 620
FHA Loans – 580
Conventional – 620
3) What are the income requirements and guidelines for a mortgage?
Proving your ability to repay the loan is one of the most important requirements in the qualification process. That’s why showing sufficient and consistent income documentation is crucial when going through the pre-approval or qualification process. If you are a W2 employee and pay a salary, then the verification process is quite simple. However, it can be more difficult for people who receive and/or depend on commissions, bonuses, overtime, etc. For borrowers who are self-employed and/or receive a 1099, it can be even more difficult and complex, especially since you may have many more write-offs and deductions when you are self-employed.
First of all, you need 2 years of work history to even qualify using any source of income. However, for full-time hourly or salaried employees, that doesn’t mean you have to be in the same company or industry for 2 years. That used to be a requirement, but not anymore, unless the lender/bank has their own overlay. If you receive and want to use commissions, bonuses, overtime or other types of income, you must show a minimum of 2 years of history and the bank/lender will use an average of 24 months to qualify. Self-employed borrowers can now qualify with 12-24 month bank statements for certain non-traditional (non-QM) loan programs.
Qualifying Income Sources:
* Full time W2 income/salary
* Income from part-time jobs (must be on the job for a minimum of 1-2 years in some cases)
* Income from a second full-time or part-time job
* Overtime, Commissions, Bonuses (must average over 24 months)
* Seasonal (must demonstrate 2-3 years of consistency)
* Income from self-employed workers
* Bank statements (12-24 months)
* Permanent disability
* Retirement pension
* Child support/alimony (sufficient documentation required)
* Asset depletion
What are the required documents needed?
There are specific required documents needed that your loan officer will request in order to process your loan approval. You should at least have the following list of documentation available and be ready to provide more based on your particular situation.
* Complete Federal Personal and/or Corporate Returns for the last 2 years (ALL ANNEXES)
* W2 of the last 2 years
* 1 month of payment receipts
* Bank statements (may need between 2 and 24 months)
* Retirement/pension and/or social security award letters
* Disability award letter
* Divorce Decree
* Business license
* Asset Documentation