Qualifying for a mortgage: The basics

Are you ready to make the jump from renting to owning a home? The first step is applying for a mortgage. To get approved, you’ll need to meet the eligibility criteria set by your lender, and understanding Rocket Mortgage requirements can help you prepare.

While the process might seem overwhelming at first, knowing what lenders look at when they consider mortgage applications can help you move forward with confidence. Let’s go over the factors that lenders use to determine whether you qualify and some tips to help you navigate the mortgage process.

Mortgage qualification tips: How to qualify for a mortgage

Your income, debt, credit score, assets, and property type all play major roles in getting approved for a mortgage. Understanding how lenders evaluate these factors is your first step toward becoming a homeowner.

Income

One of the first things lenders examine when considering your loan application is your household income. What matters to lenders is that you have enough money coming in to cover your payments along with your other bills so that you don’t default on your mortgage. The income requirements for mortgages depend on the home price and your specific lender.

Lenders also review your employment history to ensure you have a stable income. If you recently started a new job with qualifying income but were previously unemployed, there may not be sufficient income history for the lender to evaluate.

Lenders consider other reliable and regular income sources, including:

• Military benefits and allowances
• Any extra income from a side hustle
• Alimony or child support payments
• Commissions
• Overtime
• Income from investment accounts
• Social Security payments

Lenders usually will not consider a stream of income unless it is expected to continue for at least 2 more years. For example, if child support payments are set to end in 6 months, your lender is unlikely to count them as income.

Property type

The type of property you want to buy affects your ability to get a loan. The easiest property type to finance is a primary residence. When you buy a primary residence, you are purchasing a home where you plan to live for most of the year.

Primary residences are less risky for lenders because they typically are the borrower’s biggest financial priority. If you lose an income source or face unexpected expenses, you are more likely to prioritize payments on your primary home. Certain government-backed loans, such as FHA loans, can only be used to buy a primary residence.

If you want to buy a second home or investment property, you will need to meet higher credit, down payment, and debt standards since these property types carry more risk for lenders.

Assets

Your lender needs to know that if your income is interrupted, you can keep making your mortgage payments. Assets are a way to show you have other funds available to cover your mortgage. Some types of assets include:

• Checking and savings accounts
• Certificates of deposit
• Stocks, bonds, and mutual funds
• IRAs, 401(k)s, or any other retirement accounts

Your lender may ask for documentation verifying these assets, such as bank statements.

Credit score

Your credit score is a three-digit numerical rating of your reliability as a borrower. A high credit score usually means you pay your bills on time, do not take on excessive debt, and manage your spending responsibly. A low credit score might indicate frequent late payments or a pattern of taking on more monthly debt than you can afford. Home buyers with high credit scores typically get access to more loan types and lower interest rates.

Fannie Mae and Freddie Mac recently dropped the minimum credit score requirement for conforming conventional loans. Lenders still will review your credit history and evaluate your creditworthiness. Most lenders still look for a qualifying credit score of at least 620. If your credit score is below 620, you should consider a Federal Housing Administration loan.

An FHA loan is a government-backed loan with lower debt, income, and credit standards. You only need a credit score of 580 to qualify for an FHA loan with Rocket Mortgage.¹ You may be able to get an FHA loan with some lenders, even with a credit score as low as 500, if you can bring a down payment of at least 10%.

Qualified active-duty military personnel, National Guard members, reservists, and veterans may qualify for a VA Loan. While the VA does not set a minimum credit score, most lenders require a credit score of 620 for this type of mortgage.

USDA loans are offered by the U.S. Department of Agriculture to low- and moderate-income borrowers buying homes in specific rural areas. Like with VA loans, the USDA does not set a minimum credit score, but lenders typically require a credit score of at least 620. Rocket Mortgage currently doesn't offer USDA loans.

Here is a comparison of minimum credit score requirements by loan type:

Debt-to-income ratio

Mortgage lenders need to know that you have enough money coming in to cover all your bills. Looking at income alone can make this difficult to assess, which is why lenders calculate your debt-to-income ratio (DTI). Your DTI is a percentage that shows lenders how much of your gross monthly income goes toward paying your debts.

If your DTI is too high, it could suggest that your other debts may interfere with your ability to pay your mortgage. If your DTI is low, it tells lenders you can comfortably afford your monthly mortgage payment.

Calculating your DTI

You can easily calculate your DTI ratio by adding up all your fixed monthly debt payments. Only include expenses that do not vary. Then take that sum and divide it by your gross monthly income – the amount you earn each month before taxes are taken out. Then, convert this number to a percentage by multiplying by 100.

Here’s the formula:

Monthly debt payments / Gross monthly income x 100 = DTI

Include only fixed debts in your calculation, such as:

• Student loan minimum payments
• Credit card minimum payments
• Auto loan payments
• Personal loan payments
• Existing mortgage or rent payments

For example, if you have $2,500 in monthly debt payments and earn $7,000 per month before taxes, your calculation would be: $2,500 divided by $7,000, multiplied by 100, equals 35.7% DTI.

Homebuyers should aim for a DTI of 50% or lower to qualify for most loans. When it comes to qualifying for a mortgage, the lower your DTI, the better.

Lenders often use your DTI ratio along with your housing expense ratio to further determine your mortgage qualification. Learn more about buying a house with student loan debt for strategies to manage your DTI.

Other mortgage loan qualification factors

The factors lenders examine during approval are not the only things to consider before applying. You should also understand your principal, interest, taxes, and insurance (PITI), private mortgage insurance (PMI) requirements, and closing costs. These additional costs significantly impact your overall homeownership expenses.

PITI

PITI stands for principal, interest, taxes, and insurance. These four components make up your total monthly housing payment. Understanding PITI helps you estimate how much you can realistically afford.

When lenders evaluate your application, they compare your PITI to your income and DTI ratio. This gives them a more realistic picture of whether the total costs of homeownership fit within their budget and whether they qualify for a mortgage loan.

If lenders only considered your principal payment, they would miss the complete picture of your housing expenses. The PITI is the total amount you will owe each month. When compared to your income and DTI, it is another tool that helps a lender estimate if the total costs of the home are within your budget.

Private mortgage insurance

PMI protects your lender if you default on your loan. Most mortgage lenders require PMI on conventional loans if you have less than a 20% down payment. You can cancel your PMI once you reach 20% equity in your home by paying down your principal each month.

PMI typically costs between 0.46% and 1.5% of your original loan amount per year. For example, on a $300,000 loan, you might pay between $1,380 and $4,500 for PMI annually. The exact amount depends on your credit score, loan amount, and down payment size.

Closing costs

You also need to factor in closing costs when applying for a mortgage. These are processing fees you pay to your lender and third parties to finalize your loan and transfer legal ownership of the property. The specific closing costs you will pay depend on where you live and the type of mortgage you are getting.

You can expect closing costs to range from 3% – 6% of your loan amount. Examples of closing costs include:

• Appraisal fees
• Attorney fees
• Escrow fees
• Origination fees
• Title search and insurance
• Survey fees
• Recording fees
• Credit check fees

Make sure you have enough money to cover these up-front costs before applying for a loan.

How to qualify for a mortgage loan: 5 helpful tips

There are several steps you can take to strengthen your mortgage loan application and improve your chances of getting approved.

1. Improve your credit

Your credit score significantly affects your ability to get a home loan. Taking steps to repair your credit helps you qualify for more types of mortgages and unlock lower interest rates.

Here are three strategies to build better credit:

• Make all your payments on time. The easiest way to raise your credit score is by building a history of on-time payments. Note when each loan and credit card payment is due and make at least the minimum payment every time. If available, enroll in autopay for your loans.
• Watch your credit utilization ratio. Do you put too much on your credit cards each month? Lenders might see you as a riskier candidate. Try to use no more than 30% of your total available credit each month to see an improvement in your score.
• Pay down your debt. Paying down debt demonstrates that you manage your finances responsibly and do not borrow more than you can repay. Create a plan to tackle your debt systematically and watch your score improve.

2. Reduce your DTI ratio

There are two main ways to lower your DTI ratio:

• Reduce your bills. Channel extra monthly income into debt reduction and downsize to reduce living expenses.
• Increase your income. Ask for a raise at work, pick up a side hustle, or pursue overtime opportunities.

Neither method is easy, but both can significantly improve your chances of success with lenders.

3. Come up with a bigger down payment

A larger down payment reduces the amount your lender needs to loan you. This makes your loan less risky because they lose less money if you default. Saving for a larger down payment can make you a more appealing candidate and may convince a lender to be more flexible in other areas of your application.

Consider these strategies:

• Budget for savings. Review your monthly budget and decide how much you can save each month. Keep your down payment fund in a separate savings account and resist the urge to spend it.
• Access 401(k) funds. Some 401(k) plans allow you to borrow against your retirement savings or make a withdrawal for a first-time home purchase. Research the tax implications and repayment requirements before using this option.
• Look into down payment assistance programs. Many state and local governments offer grants or low-interest loans to help with down payments. Research programs available in your area using this HUD tool or through your local housing authority.
• Negotiate seller credits. Ask the seller to contribute toward closing costs, allowing you to use more of your savings for the down payment. This strategy works well in buyer's markets.

4. Explore government-backed loans

Government-backed loans are a special class of financing options insured by the federal government. This means the regulating body covers the bill on behalf of your lender if you default on your loan. Government-backed loans are less risky for lenders and are easier to qualify for. However, each government loan has specific criteria you must meet before qualifying.

There are three major types of government loans:

• FHA loans: FHA loans are insured by the Federal Housing Administration. FHA loans have looser credit score and income requirements and allow you to get a mortgage with as little as 3.5% down.
• VA loans²: VA loans are backed by the Department of Veterans Affairs and are available only to military personnel, veterans, and their surviving spouses. Generally, you can buy a home with no down payment with a VA loan. These loans offer competitive interest rates and do not require private mortgage insurance.
• USDA loans: USDA loans are insured by the U.S. Department of Agriculture. These loans allow you to buy a home in a specific rural or suburban area with no money down. Rocket Mortgage does not currently offer USDA loans.

5. Consider having a co-signer

A co-signer agrees to take financial responsibility for a mortgage if the original applicant fails to make payments. Having someone co-sign your mortgage application could strengthen it in the lender's eyes, providing assurance that the loan will be repaid even if the primary borrower defaults.

Strong co-signers typically have high income, good credit scores (such as 670 or higher), and an existing relationship with the borrower (such as a parent or close family member). The co-signer financial strength can help offset weaker areas in your application, making approval more likely.

Using a mortgage qualification calculator

You should estimate your mortgage payment for your prospective home loan to avoid surprises. Calculating this estimate helps you figure out what you can afford monthly or whether you need to improve your financial situation before applying.

For your convenience, use our mortgage calculator to get an idea of what you can afford.

What to do once you meet all mortgage requirements

If you are ready for a mortgage, the next step is applying for mortgage preapproval. Applying for preapproval shows you how much you can borrow for a home loan and helps you start shopping for your perfect property. Create a plan of action and implement it if you need more time to improve your finances before applying.

The bottom line: A strong application is the key to your dream home

Qualifying for a mortgage involves bringing together multiple pieces of your financial picture. Lenders review your income, assets, credit score, and debt-to-income ratio, along with many other qualifying factors. Once you have your finances in order and the necessary documents ready, you will be well-positioned to become a homeowner.

Ready to start the process? Start an application today with Rocket Mortgage to get approved for a mortgage.

¹ To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.