Lenders primarily look at four main criteria when evaluating whether you qualify for a loan:
- Minimum credit score
- Minimum down payment
- Maximum debt-to-income ratio
- Maximum loan-to-value ratio
These requirements can vary from lender to lender, but are largely dictated by the mortgage finance giants Fannie Mae and Freddie Mac, or the Federal Housing Administration (FHA) or Veteran’s Administration (VA) for borrowers taking advantage of government-provided mortgage insurance.
Minimum credit scoreThe lower your credit score, the higher the interest rate you can expect to be offered by lenders. If your FICO score is below the 620 minimum set by Fannie Mae and Freddie Mac, you may still be approved for an FHA loan with a credit score as low as 500.
Minimum down paymentTo qualify for the lowest interest rates on conventional mortgages not insured by the FHA or VA, homebuyers will typically have to make a down payment equal to 20% of the home’s value. Fannie Mae and Freddie Mac require mortgage borrowers making smaller down payments to have private mortgage insurance, an additional cost that allows for down payments as low as 3%.
The minimum down payment on FHA loans for borrowers with credit scores of 580 or higher is 3.5%. But FHA loans with minimum down payments of 10% are available to borrowers with credit scores as low as 500. Veterans may qualify for VA loans, which can be used to purchase a home with no down payment.
Maximum debt-to-income ratioYour debt-to-income ratio (DTI) represents the percentage of your monthly income that's required to meet ongoing expenses such as rent, utilities, car payment, and credit card bills. While mortgage lenders prefer that your DTI not exceed 36%, Fannie and Freddie will approve loans with DTIs of up to 45% or 50%. FHA-approved lenders will go all the way up to 50% in some cases.
Maximum loan-to-value ratioThe loan-to-value ratio (LTV) of a loan reflects how big the mortgage is in relation to the value of the home you’re financing. If you're putting 20% down on a home, the mortgage represents 80% of the home's value. For borrowers who are interested in cash-out refinancing, maximum LTVs are typically 80%. A new mortgage with an LTV of 80% will leave you with 20% home equity.