What Do You Need To Qualify For A Mortgage?
When purchasing a home, it is useful for prospective buyers to be aware of the various financing options that are available to them. These change from time to time, so it is important to stay on top of the latest requirements to ensure your eligibility. Here is a look at the minimum mortgage requirements in 2022.
Conventional Mortgage Requirements
Conventional loans are the most popular mortgage option for Americans and are not guaranteed by government agencies. Instead, they are backed by government-sponsored enterprises such as Freddie Mac and Fannie Mae, which place more stringent requirements than those on government-backed mortgages.
In 2022, homebuyers who qualify for a mortgage on a higher-priced home will be allowed to borrow more money as conforming loan limits have increased to $647,200 in many areas of the country. Here is a look at the minimum requirements for obtaining a conventional home loan.
The minimum down payment that is currently required on a conventional loan is 3%. This money can come from a borrower's personal finances, or it may be a gift that they have received from a family member.
The minimum credit score to obtain a conventional mortgage is 620. However, borrowers should keep in mind that having a higher score will allow them to obtain a better interest rate, along with lower private mortgage insurance premiums.
For conventional loans where borrowers are placing less than 20% down, private mortgage insurance must be purchased to protect the lender in case the borrowers' default on the loan. Placing a higher down payment and having a higher credit score will mean that private mortgage insurance will be less expensive.
However, most homeowners will pay between 0.15% and 1.95% of the amount of their loan in yearly private mortgage insurance premiums. Although they are typically included in monthly payments, homeowners can choose to pay these insurance premiums all at once upon closing.
Employment and Income
Lenders will require borrowers to present proof of a steady income. They will focus on the borrower’s past two years of employment and will typically ask for two years of federal tax returns. Although conventional loans do not generally have income limits, there are a few products that establish set limits for borrower incomes in their area.
Cash reserves are the funds needed on top of the down payment and closing costs to demonstrate to lenders your ability to pay several months of mortgage payments in case of an emergency. Some lenders may require as much as six months' worth of cash reserves depending on the borrower’s credit score, down payment, and other factors.
A borrower's debt-to-income ratio is determined by dividing their total debt by their gross monthly income. Most conventional lenders look for a debt-to-income ratio that is less than 45%. However, some may be willing to consider those with a slightly higher debt-to-income ratio if they have a higher credit score and additional mortgage reserves available.
Business Account Statements For Self-Employed Borrowers
In addition to the standard tax return requirements, borrowers who are self-employed must supply three months of business account statements, along with a profit and loss statement as further proof of their year-to-date earnings.
New Rules For Condos And Co-Ops
This year, Fannie Mae has included an additional requirement that bars borrowers from obtaining a loan for a cooperative unit or condominium that has significant deferred maintenance.
HomeReady and Home Possible Loan Requirements
There are two types of conventional mortgage loan programs for people who are paying a lower down payment, and the eligibility for these differs from those of traditional conventional mortgages.
There are income limits for eligibility in these programs that depend on the area the borrower resides. Fannie Mae offers an area median income lookup tool for its HomeReady loans, while Freddie Mac offers an income and property eligibility tool for its Home Possible loans.
Homebuyers who do not have an established credit score can use alternative data to prove their creditworthiness. For example, they may be able to provide proof of 12 months of consecutive rent payments made on time, utility bills, and payments on car insurance to prove that they have a history of paying bills on time.
Borrowers who wish to obtain a HomeReady or Home Possible loan are required to complete a homebuyer education course prior to closing.
Discuss Your Mortgage Options With Woodsboro Bank
If you are considering buying a home soon, having a high credit score and the ability to make a 20% down payment can be very helpful, but it is not the only way to obtain financing. For help determining whether you qualify for a conventional loan or to explore other financing options, reach out to the mortgage team at Woodsboro Bank today.
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