Qualifying for a home loan in 2019 – what requirements and guidelines you need to know
1) How much down payment should I come up with?
In the recent past, people thought 20% down was necessary to qualify for a home loan or have a reasonable mortgage payment. For the most part, this is no longer the case. There are many types of mortgage programs that allow for low down payment options or no down payment 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 to apply for in today’s market, mainly because of the low down payment options and flexible qualification requirements. With no down payment assistance, you only need a minimum of 3.5% down. Many people think that the FHA is only for first-time home buyers, but that is not true. it’s a government-backed home loan, but they don’t require you to be a first-time home buyer. FHA stands for Federal Housing Administration.
Conventional loans have grown in popularity over the past few years and will soon replace the FHA loan program as the most popular loan product on the market. Conventional loans allow as little down payment as 3% down and also allow for several creative ways to purchase monthly PMI (private mortgage insurance). This strategy helps reduce monthly payments while increasing your purchasing power.
Minimum down payment requirements for each loan type below:
VA Loans – No down payment required
USDA Loans – No down payment required
FHA Loans – Minimum 3.5% down payment required
Conventional loans – minimum 3% down payment required
You can use gift funds for any of the programs listed above. Also, if you are a first-time home buyer, be sure to ask your loan officer if you qualify for any down payment assistance programs.
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 the credit score, the better your chances of qualifying. When a mortgage company or bank checks your credit for a mortgage application, they will pull what is known as a tri-merge. This is when the credit report is combined with data and individual scores from the 3 major credit bureaus. Equifax, Experian and TransUnion. The average of the 3 scores will be used to determine your qualifying score. Ideally, you want to have an average credit score of 680 or higher. In most cases, the higher your credit score, the better your rate and terms will be.
There are minimum credit score requirements for each loan program, but to ensure you qualify for the most competitive terms, it’s important to do everything you can 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 only allow 580+)
USDA Loans – 620
FHA Loans – 580
Conventional – 620
3) What are the income requirements and mortgage guidelines?
Proving your ability to repay the loan is one of the most important requirements in the qualifying process. That’s why showing sufficient and consistent income documentation is critical when going through the pre-approval or qualification process. If you are a W2 employee and pay a salary, the verification process is fairly simple. However, it can be more difficult for people who receive and/or rely on commissions, bonuses, overtime, etc. For borrowers who are self-employed and/or receiving 1099s, it can be even more difficult and complicated, especially since you can have many more write-offs and deductions when you’re self-employed.
First and foremost you need 2 years of work history to qualify using any source of income. However, for hourly or full-time salaried employees, this does not mean you have to be in the same company or industry for 2 years. This used to be a requirement but not anymore unless the lender/bank has their own overlay. If you receive and wish to use commission, bonus, overtime or other types of income, then you must show a minimum of 2 years of history and the bank/lender will use a 24 month average for qualifying purposes. Self-employed borrowers can now qualify with 12-24 monthly bank statements for certain non-traditional (non-QM) loan programs.
Qualified sources of income:
* Full-time W2 income/salary
* Income from part-time work (in some cases you must be employed for a minimum of 1-2 years)
* Income from a second full-time or part-time job
* Overtime, commissions, bonuses (due on average for 24 months)
* Seasonal (must prove 2-3 years of consistency)
* Income from a self-employed person
* Bank statements (12-24 months)
* Permanent damage
* Child Support/Alimony (sufficient documentation required)
* Depletion of assets
What are the required documents?
There are specific required documents that your loan officer will request in order to process your loan approval. You should at least have the below list of documentation and be prepared to provide more depending on your specific situation.
* Complete federal personal and/or corporate tax returns for the last 2 years (ALL SCHEDULES)
* W2 for last 2 years
* 1 month worth of payments
* Bank statements (may take 2 to 24 months)
* Retirement/retirement and/or social security letters
* Disability award letter
* Divorce decision
* Business license
* Asset documentation
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