How to Qualify for a Mortgage

Homeownership is no small step. To qualify for a mortgage, you’ll need to meet your lender’s eligibility requirements.

Most financial institutions consider your credit score, debts and income when determining your ability to secure a mortgage loan.

Before you start shopping for mortgage rates, consider the following tips to improve your chances of approval and make the process easier.

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Steps to qualify for a mortgage

Whether you’re a first-time homebuyer or interested in refinancing your existing mortgage, there are different types of loans available to help you finance a property.

Both the lender and the type of loan you choose will determine the credit score, debt-to-income ratio (DTI) and down payment you’ll need to qualify.

The loan type will also determine whether or not you need to pay mortgage insurance.

Here are some general steps you can take to improve your chances of qualifying for the home loan you want.

Step 1: Work on your credit

As a prospective homebuyer, your credit score and credit history play an important role in determining the mortgage loan type, interest rate and loan amount you can qualify for.

Mortgage lenders use your credit score to determine your creditworthiness, which is your ability to repay debts. And the credit score you’ll need to qualify for a mortgage will depend on the type of loan you’re looking to get.

Loan types of credit score requirements

Loans insured by the government, such as VA loans, USDA loans and FHA loans, tend to have more flexible qualification requirements than conventional mortgage loans, which are not government-backed.

To get approved for a mortgage, whether conventional or government-backed, you’ll have to meet your lender’s minimum FICO score for that particular loan type. Generally, lenders require fair to excellent FICO scores, which range from 580 to 850.

Type of Loan Minimum FICO Score
Conventional 620
Jumbo 660
FHA 580
VA 580 (depends on the lender)
USDA 640 (depends on the lender)

Developing credit history and improving your score

Improving your credit pays off, as you could qualify for a lower interest rate with a good or excellent score. If you have bad credit or insufficient credit history, your options will likely be limited.

If you’re building credit from scratch, Experian recommends opening a credit account that reports to the major credit bureaus — like a secured credit card — maintaining a low credit utilization ratio and paying your bills on time.

On that last point, keep in mind that late payments hurt your credit score significantly.

Generally, creditors report late payments to the major credit bureaus when they are 30 days overdue. And once a late payment is on your credit report, it can stay there for up to seven years.

Checking your credit report and score

Experts also recommend checking your credit reports regularly to make sure they don’t contain incorrect items or signs of fraudulent activity that could be affecting your credit.

You won’t find your credit score in your free annual credit reports, but your credit card company might offer free score updates.

For more tips on how to boost your credit score, read our guide on how to remove negative items from your credit report.

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Step 2: Save up for a down payment

What you put down on the house can influence the type of loan you can get, as well as your interest rate and loan-to-value (LTV) ratio — the loan amount divided by the current value of the home.

How large a down payment you will need to make is subject to the type of mortgage you choose and the property you’re buying.

Lenders may require a different down payment for an investment property than a primary residence, for example. And mortgages like VA and USDA loans don’t always require a down payment but an upfront funding fee instead.

Benefits if a higher down payment

Most homeowners provide a down payment ranging from 3% to 20% of the home’s purchase price.

The higher your down payment, the lower your LTV. Some benefits of providing a higher down payment include lowering your interest rate and monthly payments and reducing your debt-to-income ratio.

With conventional loans, you can also avoid mortgage insurance by putting 20% down. However, if you put less than 20% down, you’ll generally have to pay mortgage insurance until you reach 80% in equity.

Tips to save for a down payment

You can save up for a down payment by reducing your credit card debt, lowering your expenses and setting up a high yield savings account, money market account or similar savings vehicle.

Additionally, most states offer down payment assistance for first-time homebuyers.

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Step 3: Lower your debt

If you have student loan debt or credit card debt, you likely have a high debt-to-income ratio.

Lenders use your DTI to gauge your ability to afford a mortgage in addition to existing expenses.

Most lenders will require a DTI ratio of less than 43 %, but this will depend on the type of loan you’re applying for. In general, a DTI of 35% is considered excellent.

To determine your DTI, lenders take into account your front-end and back-end DTI.

Front-end DTI

Your front-end ratio consists of your monthly housing expenses divided by your monthly gross income. Housing-related expenses include your future mortgage payment, taxes and mortgage insurance.

Back-end DTI

The back-end DTI is the percentage of your gross income spent on monthly debts.

The items detailed in your credit report often comprise your back-end DTI. This includes monthly obligations such as credit cards, car loans, student loans, child support and personal loans.

Other items such as utility costs, your savings account contributions and 401(k) or Roth IRA savings are not factored into your back-end DTI.

Lowering your DTI

You will need to pay off some of your debts entirely or increase your income to lower your DTI.

You can also consider debt consolidation, which would bundle your existing debts into one monthly payment. Debt consolidation is worth considering if it reduces your interest rate, as that can help you save money in the long run.

Find out what your DTI is with our debt-to-income calculator. If your DTI is high, work to pay down some of your debt before applying for a mortgage. This will increase your chances of approval.