Advertiser Disclosure

Mortgage

Minimum Mortgage Requirements for Buying or Refinancing a Home in 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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 typeCredit scoreDown paymentDTI ratioOccupancy
Conventional6203%45% (or less), but can go up to 50% in some instancesPrimary
FHA500-579
580
10%
3.5%
43%*Primary
VANo minimum (620 recommended)0%41%*Primary
USDA6400%41%*Primary, in designated rural areas
*Borrowers with higher DTI ratios may be approved in some cases

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 typeMaximum LTV ratioPurpose of refinancingCredit scoreDTI
Conventional
rate-and-term refinance
97%Reduce rate and payment62045%*
Conventional cash-out refinance80%Withdraw cash from home equity62045%*
FHA streamline refinanceN/AReduce rate and paymentN/A
History of on-time payments
N/A
FHA cash-out refinance80%Withdraw cash from home equity50041%*
VA interest rate reduction refinance loan (IRRRL)N/AReduce rate and paymentN/A
Prove on-time payments
N/A
VA cash-out refinance90%Withdraw cash from home equityNo minimum
(620 recommended)
41%*
USDA refinanceN/AReduce rate and paymentN/A
History of on-time payments
N/A
*Borrowers with higher DTI ratios may be approved in some cases

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.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

Advertiser Disclosure

Mortgage

What’s the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a mortgage gives you a baseline to help decide if it’s time to apply for preapproval or take some steps to boost your credit first.

The minimum credit scores for home loans

A FICO score of 500 is the minimum credit score you need to qualify for a loan insured by the Federal Housing Administration (FHA). Meanwhile, conventional loans require at least a 620 score. These minimum score requirements serve as a starting point for what types of loans you might qualify for. Later, we’ll explain why you should aim for a higher score instead of purchasing a home with bad credit.

Loan typeMinimum credit score
Conventional620
FHA500 with 10% down payment
580 with 3.5% down payment
VANo credit minimum, but 620 recommended
USDA640

Conventional loans. A 620 credit score allows you to make a down payment as low as 3%, but the mortgage payment may be hefty for a few reasons:

  1. The interest rate will be higher to compensate the lender for extra default risk.
  2. Private mortgage insurance premiums (PMIs) are impacted by credit scores and are required with less than a 20% down payment.

FHA loans. The FHA insures 500-credit-score home loans if you can make the 10% required down payment. FHA-approved lenders may approve loans with a 3.5% down payment and a minimum credit score of 580. The FHA limits how much you can borrow depending on where you live.

VA loans. Active-duty servicemembers, veterans and their eligible spouses have access to loans backed by the U.S. Department of Veterans Affairs (VA) with a 0% down payment. The VA doesn’t set minimum credit score guidelines, but many VA-approved lenders require at least a 620 to qualify.

USDA loans. Low- to moderate-income buyers with at least a 640 credit score may qualify for a loan guaranteed by the U.S. Department of Agriculture (USDA). Only homes located in designated rural areas are eligible, and income limits apply. You may qualify with a lower USDA loan credit score in special circumstances.

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to lower monthly payments and lower interest rates. In addition, a good credit score can also allow you access to more choices for home loan financing.

  • 740 credit score. You’ll typically get the best interest rates for a conventional mortgage with a 740 credit score. If you make less than 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score home loans. Offered by FHA-approved lenders with at least a 10% down payment.

Mortgage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage. You can get a glimpse at how lenders assess the risk of different credit scores by looking at the rate mark-up for lower credit scores and down payment amounts.

The table below shows Fannie Mae’s loan-level price adjustment (LLPA) and the related dollar cost of each credit score based on a 3% down payment for a $200,000 loan.

Credit scorePrice adjustmentDollar cost
≥ 7400.75%$1,500
720-7391%$2,000
700-7191.5%$3,000
680-6991.5%$3,000
660-6792.25%$4,500
640-6592.75%$5,500
620-6393.5%$7,000

With every 20 points lower in credit score, the dollar cost of the interest rate increases, reaching $7,000 for the lowest credit score. Rather than charging you the cost as a discount fee, the lenders hike up your interest rate to cover the risk of a lower credit score.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, following some of these tips may help you boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Keep balances low. The best plan is to pay your entire balance off as your charge credit cards. But if you do carry a balance, try to keep it at 30% or less of the credit limit.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get the best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Advertiser Disclosure

Mortgage

Getting Preapproved for a Mortgage: A Crucial First Step

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

Getting a mortgage preapproval is a crucial stepping stone on your way to becoming a homeowner, but it doesn’t mean you’re in the clear to borrow from a lender just yet. A preapproval does give you a leg up over the competition, though.

See Mortgage Rate Quotes for Your Home

See RatesSee RatesSee RatesTerms Apply. NMLS ID# 1136

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

What is a mortgage preapproval?

A mortgage preapproval means a lender has vetted your credit and finances and has made an initial loan offer based on its findings. Lenders share this information in writing, so you may hear it referred to as a preapproval letter.

Getting prequalified for a home loan is not the same as a preapproval. Mortgage prequalification provides a rough estimate of how much you might qualify for, based on a surface-level review of your financial information.

A preapproval, however, is a more thorough vetting of your finances and provides a more accurate idea of what a lender may offer in terms of a loan amount and interest rate. You provide financial documentation and agree to a review of your credit profile, which means the lender will pull your credit reports and scores. With a prequalification, you typically self-report your financial information and lenders don’t check your credit.

5 steps to getting preapproved for a mortgage

It’s not worth falling in love with a house until you know the sales price matches up with a mortgage amount you can realistically afford. Here’s how to get preapproved for a mortgage.

  1. Determine your homebuying timeline. The best time to apply for a mortgage preapproval is before you start house hunting. You may want to hold off on a preapproval if you’re not quite ready to begin the homebuying process. Even if you’re not yet prepared, you can get started by pulling your free credit reports from each bureau at AnnualCreditReport.com and reviewing minimum mortgage requirements.
  2. Review and improve your credit profile. With your credit reports in hand, it’s time to look for areas of improvement. The minimum credit score you need for a mortgage varies by program type, but you’ll need at least a 620 credit score in many cases. Dispute any inaccurate information you find, keep your credit card balances low and consistently pay your bills on time. Refrain from applying for new credit and closing any of your existing accounts, too.
  3. Pay down your debt. Pay down your debt. Aside from your credit scores, lenders care about how you manage your debt now and how you’ll fare if you get a mortgage. Your debt-to-income ratio, or the percentage of your gross monthly income used to repay debt, should stay at or below 43%. The less debt you have, the less risky you appear to lenders.
  4. Gather your documents. Lenders will request several documents from you for a preapproval, including:
    • Government-issued photo ID
    • Social Security number
    • Bank statements from the last 60 days
    • Pay stubs from the last 30 days
    • Two years of W-2s or 1099 tax forms
    • Credit reports and scores from all three bureaus
  5. Apply with multiple lenders. Consider banks, credit unions, mortgage brokers and nonbank lenders when applying for a mortgage preapproval, and shop around with three to five lenders to get the best rates. Additionally, keep your shopping period within 14 to 45 days to minimize the impact of those credit inquiries against your credit scores.

How long does a mortgage preapproval last?

A mortgage preapproval typically lasts for 30 to 60 days. The average time to close on a house is 48 days, according to Ellie Mae’s latest Origination Insight Report, so there’s a chance you can get through the full homebuying process before time runs out.

If your preapproval letter expires before you close, you’ll need to go through the process again, submit documentation and have your credit reports and scores pulled, which creates a new credit inquiry and affects your score.

Pros and cons of mortgage preapproval

The mortgage preapproval process includes several benefits, but there are also drawbacks to consider.

Pros:

  • You’ll get a better idea of how much house you could afford, which helps narrow down your price range.
  • Home sellers take you more seriously because you’ll have proof that a lender is willing to back you when you submit an offer.
  • You can comparison shop before committing to a lender.
  • Even if your preapproval is denied, you may walk away with an analysis of where you stand financially and how you can improve.

Cons:

  • A preapproval is not a full approval. It doesn’t guarantee you’ll qualify for a mortgage.
  • Preapprovals typically last for 30 to 60 days. If you don’t buy a home within this time frame, you’ll need a new mortgage preapproval letter.
  • Making changes that affect your credit, such as applying for a new credit line or racking up debt, can prevent you from getting a full mortgage approval.

What happens after you get preapproved for a mortgage?

Once you’ve been preapproved and have chosen a mortgage lender, it’s time to find your home and submit an offer to buy it. You’ll also continue working your way through the mortgage approval process, which includes:

  • Providing your lender with any additional documents needed to finalize your loan.
  • Getting a home appraisal and home inspection.
  • Preparing for your walk-through and closing day.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.