Today’s Minimum Mortgage Requirements

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Homeownership is a goal that many people hope to achieve one day. It might even be a goal that you hope to accomplish in the near future.

If you are planning to purchase a home soon, then you should be aware of your loan options. Each type of mortgage loan has different requirements. Once you are aware of the various requirements, choose the best mortgage option that you qualify for to finance your home purchase.

Minimum requirements for common mortgage types

Let’s take a closer look at the requirements of common mortgages. Understanding the different requirements can help you to choose the best option for you.

Federal Housing Administration loans

The Federal Housing Administration (FHA) mortgage loan program is operated by the U.S. Department of Housing and Urban Development (HUD). FHA loans are designed to provide more people with the opportunity to purchase a home by guaranteeing home loans.

The minimum down payment associated with FHA loans varies based on your credit score. If you have a credit score of at least 580, then you may only need to put down 3.5%. If your score is between 500 and 579, then you will need to put down at least 10%. However, keep in mind that a lower credit score will be associated with higher interest rates.

You will also need to keep the LTV (loan-to-value) ratio at 90% or less if your credit score is between 500 and 579. If your credit score is above 580, then you are able to receive financing for the maximum amount allowed in your area.

The DTI (debt-to-income) ratio of the purchaser cannot exceed 31% for the debt of the mortgage payment alone. Additionally, total DTI, which includes other debts like car payments and student loans, cannot exceed 43%.

When you decide to apply for an FHA loan, then you will need to give HUD many documents, including a valid Social Security card, a means to verify your income, a complete credit history and an outline of your assets and liabilities. Once you are approved by FHA, you will need to contact an FHA-approved lender. HUD does not lend the money directly, but instead works with a network of lenders that will work with you on securing the loan for your home purchase.

Conventional loans

Conventional loans are not federally guaranteed, so lenders typically have higher requirements for these loans.

Traditionally, conventional mortgages are associated with higher down payments of up 20%. However, some lenders are now offering down payment options as low as 3%.

Many lenders have different requirements for minimum credit scores. Typically, lenders require a credit score of at least 620. However, some may underwrite mortgages with lower credit scores in some situations. The higher your credit score, the better the rate you will be able to obtain.

Conventional loans can allow for up to 97% LTV on home purchases. Many conventional mortgage lenders require a DTI of less than 43%. Each lender may have slightly different requirements.

In order to qualify for a loan, the lender will need to approve you based on your total gross income, employment history, credit score, assets and monthly fixed expenses. Be prepared to provide copies of your pay stubs, employer address, W-2s, tax returns for the past two years, bank statements from the past several months, Social Security card, information on any other debts and information about any accounts you may have. These forms are typically required in most home loan approval processes.

VA home loans

VA loans are offered through the U.S. Department of Veterans Affairs. The goal of the home loan program is to assist servicemembers, veterans and their families in the purchase of their home. The loans are provided through private lenders and guaranteed by the VA.

With a VA home loan, there is no minimum down payment unless the lender requires it or the purchase price of the home is beyond its reasonable market value. Loans through this program can have an LTV of up to 100%. Before you can purchase the property through the VA loan, you will need to provide proof that it is safe, sanitary and sound.

There are no minimum credit requirements. Additionally, there is no maximum DTI ratio requirement unless the total debt ratio exceeds 41%. Past that point, the lender would need to indicate compensating factors to allow the loan.

In order to qualify for a VA loan, you will need to provide forms that prove your service. Depending on your current military status, the type of form will vary. However, you will need to provide proof of service before obtaining your Certificate of Eligibility (COE). Once you have the COE, you will be able to talk to VA-approved lenders to continue the process of securing your loan. Be prepared to provide the lender with all of the traditional documentation that is required in most loan applications.

USDA loans

USDA housing loans are provided through the U.S. Department of Agriculture and Rural Development. The goal of the program is to allow homeownership opportunities to households with low to moderate income. In order to apply, the applicant must be without decent, safe and sanitary housing. Most areas with populations less than 35,000 are eligible for USDA home loan purchases.

USDA loans do not usually require a down payment. However, if an applicant has a certain level of assets, they may be required to provide a down payment.

The USDA does not set any minimum credit score requirements, but the USDA does not lend the money directly to borrowers. Lenders that provide these loans typically have credit requirements of at least 640.

Any applicant for USDA home loans cannot have a DTI that exceeds 41%. The maximum LTV ratio is 100%.

As with most mortgages, you will need to provide proof of your identity, credit history, assets, liabilities, employment history and more. Additionally, you will need to provide proof that the property is in a qualifying rural area.

HomeReady and Home Possible loans

Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® loans provide low down payment options on conventional loans. For both programs, you will need to provide ample documentation of your employment history, credit history, W-2s, driver’s license and information about your assets and liabilities.

Fannie Mae HomeReady

With this loan option, the minimum down payment required is 3%. Borrowers can have a credit score as low as 620 and a DTI ratio of up 50%.

The LTV for HomeReady loans can be up to 97%.

Freddie Mac Home Possible

With this loan option, the minimum down payment required is 3%. Borrowers can have a minimum credit score of 660. Additionally, you can have a DTI ratio of up to 45%.

The LTV for Home Possible loans can be up to 97%. With this loan option, you cannot have an income that exceeds 100% of the median income in the area unless the property is in a low-income census tract.

Bottom line

You have many options when it comes to finding financing for your future home purchase. If you are unsure which is best for you, then you should consult with a homebuying professional about your specific situation.

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