1) How much deposit should I come up with?
In the recent past, people thought 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 for a low down payment 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 applied for in today’s market, mainly due to the low down payment options and flexible qualification requirements. Without down payment assistance, you only need a minimum of 3.5% down payment. Many people think that FHA is exclusively for first-time homebuyers, but that’s not true. it’s a government-backed home loan, but they don’t require you to buy a home for the first time. FHA stands for Federal Housing Administration.
Conventional loans have gained a lot of popularity in recent years and will soon replace the FHA loan program as the most popular loan product in the market. Conventional loans allow for a minimum down payment of just 3% and also offer several creative ways to buy off the monthly PMI (Private Mortgage Insurance). This strategy helps reduce 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 – Minimum 3.5% down payment required
Conventional Loans – Minimum 3% down payment required
You can use gift money for any of the programs listed above. If you are buying a home for the first time, ask your loan counselor if you qualify for a down payment program.
2) What credit score do I need to qualify for a mortgage?
Aside from income verification, your credit score is one of the biggest determinants of qualifying for a mortgage. 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 pull what’s known as a tri-merge. That’s when a credit report is combined with data and individual scores from the 3 major credit bureaus. Equifax, Experian and TransUnion. The middle of the 3 scores is 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 as well.
There are minimum credit score requirements for every loan program, but to make sure you qualify for the most competitive terms, it’s important that you 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 guidelines for a mortgage?
Demonstrating your ability to repay the loan is one of the most important requirements in the qualification process. Therefore, 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 rely on commissions, bonuses, overtime, etc. For borrowers who are self-employed and/or receive a 1099, it can be even more difficult and complicated, especially since you have a lot more debits and deductions if you are self-employed.
First and foremost, you need a 2 year work history to even qualify for a source of income. However, for full-time or salaried employees, this does not mean you have to work for the same company or industry for 2 years. This used to be a requirement, but not anymore unless the lender/bank has its own overlay. If you receive and wish to use commission, bonus, overtime or other types of income, you must demonstrate 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 month bank statements for certain non-traditional (non-QM) loan programs.
Qualifying sources of income:
* Full-time W2 Income/Salary
* Income from part-time jobs (must be employed for at least 1-2 years in some cases)
* Income from a second full-time or part-time job
* Overtime, commissions, bonuses (must be averaged over 24 months)
* Seasonal (need to prove 2-3 years of consistency)
* Income as a self-employed person
* Bank statements (12-24 months)
* Permanent limitation
* Child support/alimony (sufficient documentation required)
* Asset depletion
What are the required documents needed?
There are specific required documents that your loan advisor will request to process your loan approval. At a minimum, you should have the list of documentation below and be prepared to provide more depending on your specific situation.
* Complete federal personal and/or corporate income tax returns for the past 2 years (ALL SCHEDULES)
* W2s from the past 2 years
* 1 month of payslips
* Bank statements (may take 2-24 months)
* Retirement/pension and/or social security award letters
* Disability Award Letter
* Divorce agreement
* Business license
* Asset documentation