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If you plan to buy or refinance a home, having a basic grasp of minimum mortgage requirements will help you zero in on the best home loan for your needs. Knowing the lending guidelines for income, debt, credit scores and down payments puts you in a better position to shop around for a home loan.
Minimum mortgage requirements to buy a home
When you purchase a home, lenders review your entire financial picture to ensure you’re likely to repay the loan. Lenders consider the following items:
Down payment amount. A down payment — the upfront money required to buy a home — can come from your own savings, a gift or down payment assistance.
Credit score. Lenders pull your credit to review your scores and assess how you’ve managed credit accounts over time. Typically, the higher your credit score, the lower your interest rate and monthly payment will be.
Debt-to-income (DTI) ratio. Lenders divide your total debt, including your mortgage, by your gross monthly income to calculate your DTI ratio. The Consumer Financial Protection Bureau (CFPB) suggests a DTI ratio of no more than 43%.
Occupancy. Minimum mortgage requirements are the most lenient if you’re buying a home as a primary residence.
Here are the key mortgage requirements for the most popular loan programs:
|Loan type||Credit score||Down payment||DTI ratio||Occupancy|
|Conventional||620||3%||45% (or less), but can go up to 50% in some instances||Primary|
|VA||No minimum (620 recommended)||0%||41%*||Primary|
|USDA||640||0%||41%*||Primary, in designated rural areas|
Conventional loans. Fannie Mae and Freddie Mac have stricter conventional loan guidelines than government-backed mortgages. Here are some conventional programs worth considering:
- Conventional 97% financing. With no income limits, qualified buyers can borrow up to the maximum conforming loan limit of $510,400 in 2020 (borrowers in high-cost areas have higher limits). However, you must be a first-time homebuyer to be eligible.
- Fannie Mae HomeReady®. The HomeReady program requires a 3% down payment and isn’t just for first-time homebuyers. Income eligibility varies by location. Borrowers must complete a mandatory homebuyer education course.
- Freddie Mac Home Possible®. A 3%-down program that provides extra flexibility for sweat-equity down payments and co-borrowers. Income limits also apply.
- Conventional loans with private mortgage insurance (PMI). Conventional lenders require mortgage insurance to cover the risk of making loans with less than a 20% down payment. Also called private mortgage insurance (PMI), the premium is added to your monthly payment. The lower your credit score and down payment, the higher the monthly PMI cost.
FHA loans. The Federal Housing Administration (FHA) insures mortgages with lenient qualifying guidelines. First-time homebuyers with rocky credit and little saved for a down payment may get approved for a government home loan if they don’t qualify for a conventional mortgage. Features of FHA loans include:
- Loan limits. FHA loan requirements include limits on how much you can borrow based on where you live.
- Upfront and annual mortgage insurance. To offset the risk of lending to borrowers with lower credit scores, the FHA charges two types of mortgage insurance premiums: upfront and annual. The first is a lump-sum, upfront mortgage insurance premium (UFMIP) of 1.75%. An annual mortgage insurance premium (MIP) ranging from 0.45% to 1.05% of the loan amount is paid monthly as part of your mortgage payment. FHA mortgage insurance premiums are the same regardless of your credit score.
VA loans. Active-duty military service members, veterans and eligible spouses can benefit from home loans guaranteed by the U.S. Department of Veterans Affairs (VA). Even with no down payment, mortgage insurance is not required for VA loans. Instead, borrowers pay a funding fee to offset the costs of the VA loan program to taxpayers.
USDA loans. Low- to moderate-income families can purchase homes in designated rural areas with a loan guaranteed by the U.S. Department of Agriculture (USDA). You’ll pay upfront and annual guarantee fees, but no down payment is required. Use the USDA property eligibility tool to see if a home near you qualifies.
Minimum mortgage requirements for a refinance mortgage
Lenders use a different set of criteria to approve refinance mortgages versus a purchase loan. Factors considered for a refinance include:
Reason for a refinance. Getting a mortgage to reduce your current monthly payment usually comes with the easiest qualifying guidelines. Some government-backed refinance programs don’t require income paperwork or an appraisal. Tapping equity with a cash-out refinance (which replaces your current loan with a larger loan and lets you withdraw the difference in cash) comes with extra restrictions.
Loan-to-value ratio (LTV). Lenders consider how much money you’re borrowing compared to the home’s value. Refinance mortgage guidelines for LTV ratios are more flexible for rate-reduction refinances than other types of refinance transactions.
Here are the key mortgage requirements for the most popular refinance loan programs:
|Loan type||Maximum LTV ratio||Purpose of refinancing||Credit score||DTI|
|97%||Reduce rate and payment||620||45%*|
|Conventional cash-out refinance||80%||Withdraw cash from home equity||620||45%*|
|FHA streamline refinance||N/A||Reduce rate and payment||N/A |
History of on-time payments
|FHA cash-out refinance||80%||Withdraw cash from home equity||500||41%*|
|VA interest rate reduction refinance loan (IRRRL)||N/A||Reduce rate and payment||N/A |
Prove on-time payments
|VA cash-out refinance||90%||Withdraw cash from home equity||No minimum |
|USDA refinance||N/A||Reduce rate and payment||N/A|
History of on-time payments
Home loan requirements vary when it comes to the paperwork you’ll need and how closing costs can be financed. Refinance mortgage closing costs typically run 2% to 6%, depending on your loan amount.
Conventional rate-and-term refinance. This conventional refinance program allows you to reduce your rate and roll in closing costs for up to 80% of your home’s value. Plan on providing income documents again but, in some cases, an appraisal isn’t required.
Conventional cash-out refinance. Replacing your current loan with a larger one and pocketing the difference in cash entails the same process as when you bought your home. You may pay a higher rate if you have poor credit scores. A conventional cash-out refinance doesn’t require any mortgage insurance and is an ideal cash-out choice for borrowers with a credit score of 620 or higher.
FHA streamline refinance. As long as you’ve made at least seven payments on your current mortgage on time, you’re eligible for an FHA streamline refinance. No income verification or appraisal is required. One catch, though: You’ll pay a higher interest rate if you don’t want to pay closing costs out of pocket; they can’t be rolled into your loan amount without an appraisal.
FHA cash-out refinance. Although you can tap equity up to the same LTV as a conventional loan, FHA requires you to pay both MIP and UFMIP again. The FHA program is one of the more common cash-out refinance loans for bad credit.
VA IRRRL. A VA interest rate reduction refinance loan allows eligible borrowers with a current VA loan to refinance without proving income or getting an appraisal. An added bonus: you can roll closing costs into your loan amount.
VA cash-out refinance. Current VA borrowers can tap more equity than conventional or FHA loan programs allow. Full income and credit documentation, along with a VA appraisal, are reviewed for approval.
USDA streamlined-assist refinance. Homeowners with a current USDA loan paid on time in the past 12 months are eligible. No appraisal or income verification are required. Closing costs (including the guarantee fee) can be rolled into the loan amount.