This is part of an ongoing series in which we answer common questions among first-time home buyers. Today’s question is: How easy is it to get approved for a mortgage loan these days?
While it’s not necessarily “easy” to get approved for a mortgage loan today, it has gotten a bit easier over the last few years. We’ll talk about the reasons why in a moment.
But borrowers still must undergo an intensive financial review process that includes a lot of documents, paperwork, and an examination from an underwriter.
Minimum Requirements for Borrowers
Before we go any further, let’s talk about some of the minimum requirements to get approved for a mortgage loan. These requirements tie into our discussion and will help to answer the question at hand.
While there are exceptions to all of these general “rules,” borrowers trying to get approved for a mortgage loan should have the following items in their favor:
- A decent credit score. There is no single cutoff point for credit scores, when it comes to getting approved for a home loan. With that being said, recent statistics show that most successful loans (those that actually close) went to borrowers with credit scores of 600 or higher. It’s possible to qualify with a score below that level, but you might have to shop around a bit more to find a willing lender. Learn more in this article about minimum scores.
- A down payment (maybe). While there are a few mortgage programs that offer 100% financing, they represent a small percentage of the total loans generated these days. Most mortgage programs require some kind of upfront investment from the borrower. Conventional loans tend to require at least 3% down, while some lenders may require up to 5% from the borrower. FHA loans have a minimum down payment requirement of 3.5% for all home buyers. A couple of exceptions: The VA loan program offers 100% financing, and there are some credit unions and other programs available that do the same.
- A manageable level of debt. When you apply for a home loan, the lender will review your current income and debt situation to make sure that you are capable of taking on a mortgage loan. They will use something known as the debt-to-income ratio to assess your ability to repay. Generally speaking, a borrower should have a total debt-to-income ratio no higher than 50%. But again, there are exceptions to this rule. The point is, a person with less debt may find it relatively easy to get approved for a mortgage loan, compared to someone with a higher level of recurring debt.
- Documented income. For obvious reasons, a person applying for a mortgage loan must have sufficient income to make the monthly payments on that debt. Mortgage lenders will want to see documented proof of your monthly income before approving you for a home loan. They will review a variety of documents, including pay stubs, tax returns, and W-2 forms.
If you meet all of the minimum requirements stated above, you might find it fairly easy to get a mortgage loan. On the other hand, if you fall short of these minimum criteria, your application might be denied — or you might have to submit multiple applications to get approved.
It’s Not ‘Easy’ to Get Approved for a Mortgage, But Easier
It’s not necessarily easy to get approved for a mortgage loan these days. But it has gotten a bit easier over the last few years, due to some changes made by Fannie Mae and Freddie Mac.
Fannie and Freddie are the two government-sponsored enterprises (GSEs) that purchase mortgage loans from lenders, securitize them, and sell them off to investors. They do this to inject liquidity into the mortgage market and to keep things moving.
Fannie Mae and Freddie Mac have specific rules regarding the loans they can purchase, and these rules and requirements are important for borrowers because they can affect your ability to get approved for a mortgage loan.
When Fannie and Freddie relax their purchase criteria, it makes it easier for borrowers in the primary market to get approved for financing. And this is what we have seen over the last few years.
Down payments are one of the areas where it is now easier to qualify for a mortgage loan. Both of the GSEs will now purchase loans that account for up to 97% of the home’s value. This means borrowers can often make a down payment as low as 3%. In the past, the minimum down payment for a conventional loan was a bit higher.
Additionally, Fannie Mae recently announced that it would raise its limit for debt-to-income ratios. This means borrowers can have a higher level of debt and still get approved for mortgage loan. We covered this in a separate blog post.
Credit scores, on the other hand, have remained fairly consistent over the last few years. Recent data from Ellie Mae (a mortgage origination software company) revealed that most closed loans went to borrowers with credit scores of 600 or higher. This “threshold” has been fairly steady over the last few years. So were not seeing a lot of change in the credit score department.
Disclaimer: This article addresses the question, how easy is it to get approved for a mortgage loan? We have provided a basic overview of current trends within the mortgage industry. But there are exceptions to all of the “rules” mentioned above. Every lending scenario is different, because every borrower is unique. So your experience might differ from the general examples provided above. The only one who can tell you if you are qualified for a mortgage loan is a lender.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author