Qualifying for a Home Loan in 2019: Requirements and Guidelines to Know

1) How much advance payment must I contribute?

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 home buyer to qualify for these programs.

FHA loans are one of the most popular types of mortgages applied for in today’s market, this is primarily due to low down payment options and flexible qualification requirements. With no down payment assistance, you only need a minimum 3.5% down payment. Many people think that the FHA is strictly for first-time home buyers, but that is not true. It is a government backed home loan, but it does not require you to be a first time home buyer. FHA stands for Federal Housing Administration.

Conventional loans have been gaining ground in recent years and will soon replace the FHA loan program as the most popular loan product on the market. Conventional loans allow a minimum down payment of just 3% and also allow for several creative ways to purchase your monthly PMI (private mortgage insurance). This strategy helps lower your monthly payments while increasing your purchasing 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 – A minimum 3.5% down payment is required
Conventional loans: a minimum 3% down payment is required

You can use gift funds for any of the programs listed above. Also, if you are buying a home for the first time, be sure to ask your loan counselor if you qualify for a down payment assistance program.

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 extract what is known as a triple merger. That’s when a credit report is combined with individual data and scores from the 3 major credit bureaus. Equifax, Experian and TransUnion. Half of the 3 scores will be used to determine your qualification 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 will also be.

There are minimum credit score requirements for each loan program, but to ensure you qualify for the most competitive terms, it is important that you do your best to learn how to increase 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?

Demonstrating 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 paid a salary, 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 can have many more write-offs and deductions when you are self-employed.

First of all, you need a 2-year work history to qualify even with any source of income. However, for salaried or full-time 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 overlap. If you receive and want to use commissions, bonuses, overtime, or other types of income, you must show a minimum 2-year history and the bank / lender will use a 24-month average for qualification purposes. Self-employed borrowers can now qualify with 12-24 month bank statements for certain non-traditional (non-QM) loan programs.

Qualified sources of income:

* 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 more than 24 months)
* Seasonal (must demonstrate 2-3 year consistency)
* Self-employed income
* Bank statements (12-24 months)
* Permanent disability
* Retirement pension
* Child support / alimony (sufficient documentation required)
* Asset depletion

What are the required required documents?

There are specific required documents that your loan advisor will request to process your loan approval. You should have at least the following list of documentation available and be ready to provide more depending on your particular situation.

* Complete personal and / or corporate federal tax returns for the last 2 years (ALL HOURS)
* W2 of the last 2 years
* 1 month of proof of payment
* Bank statements (may take between 2 and 24 months)
* Letters of retirement / pension and / or social security award
* Disability award letter
* Divorce decree
* Business license
* Asset documentation

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