Qualifying Criteria
The 3 Biggest Criteria for Qualifying for a Home Loan: Credit, Income, and Savings
Why These 3 Factors Matter Most
Getting approved for a mortgage may seem complex, but lenders primarily focus on three key factors: credit, income, and savings. Understanding how each affects your ability to secure home financing can help you better prepare for homebuying.
1. Credit Score: Your Financial Reputation
Your credit score plays a crucial role in determining your mortgage eligibility, loan terms, and interest rate. A higher score can save you thousands of dollars over the life of your loan.
What Credit Score Do You Need?
- Conventional Loans: 620+ (better rates with 740+)
- FHA Loans: 580+ (with 3.5% down) or 500-579 (with 10% down)
- VA Loans: No official minimum, but 580+ is preferred
- No-Income and Special Programs: Some options exist for lower scores, but rates and terms vary
How to Improve Your Credit Before Applying
- Pay bills on time—35% of your score is based on payment history.
- Keep credit utilization below 30% of your available limit.
- Avoid opening or closing accounts before applying for a loan.
- Check your credit report for errors and dispute any inaccuracies.
Quick Fact: According to the Federal Reserve, borrowers with a credit score above 760 qualify for the lowest interest rates, while those below 620 often pay significantly more interest.
2. Income: Your Ability to Repay the Loan
Lenders want to ensure you have a stable income to afford your monthly mortgage payments. Your debt-to-income ratio (DTI) is a major factor in determining your eligibility.
What Is Your Debt-to-Income Ratio (DTI)?
DTI is the percentage of your monthly debt payments compared to your gross monthly income.
- Ideal DTI for Conventional Loans: Below 45%
- FHA Loan Max DTI: Can go up to 56% with strong compensating factors
- VA Loan Max DTI: Typically 50%, but exceptions exist
Income Sources That Count Toward a Mortgage
- W-2 income from full-time or part-time jobs
- Self-employment income (requires 2 years of tax returns)
- Bonus, commission, or overtime income (consistent history needed)
- Rental income (if documented properly)
- Retirement, pension, or Social Security income
Pro Tip: Lenders typically use a two-year average for qualification if your income fluctuates (e.g., commission-based).
3. Savings: Your Down Payment and Reserves
Your savings impact two major aspects of home financing: your down payment and cash reserves. Lenders want to see that you have enough funds to close the deal and handle unexpected expenses.
How Much Do You Need for a Down Payment?
- Conventional Loan: As low as 3% down for first-time buyers
- FHA Loan: 3.5% down (or 10% if the credit score is under 580)
- VA & USDA Loans: 0% down (for qualified buyers)
- No-Income Loan Programs: May require 20-25% down
What Are Reserves, and Why Do They Matter?
Many loan programs require you to have additional savings beyond your down payment, known as reserves. This is typically 2-6 months’ worth of mortgage payments set aside in savings.
Creative Ways to Boost Your Savings
- Use gift funds from family (allowed for most loan programs)
- Check for down payment assistance programs (many exist for first-time buyers)
- Utilize 401(k) loans (if allowed by your employer)
Final Thoughts: Preparing for a Smooth Home Loan Approval
Focusing on credit, income, and savings’ll increase your chances of getting approved for a mortgage with the best possible terms. If you’re unsure where you stand, working with a loan officer early in the process can help you identify improvement areas and maximize your buying power.
Need help figuring out where you stand? Let’s connect and review your options