Minimum Mortgage Requirements for 2020
If you’re thinking about qualifying for a mortgage to buy a home this year, knowing the minimum borrowing guidelines can help you find your best loan program. In 2020, there will be mortgage options available at higher loan amounts that reflect rising home prices in many parts of the United States.
Let’s look at how much mortgage you can qualify for by looking at the guidelines for the most common loan types.
- Conventional loan requirements
- FHA loan requirements
- VA loan requirements
- USDA loan requirements
- Key mortgage documents
Conventional loan requirements
Conventional loans are not guaranteed by any government agency, and are the most popular mortgage option. Fannie Mae and Freddie Mac set conventional loan guidelines, which tend to be more strict than borrowing standards for government-insured loans.
Qualifying for a mortgage for a higher-priced home is a bit easier this year, with loan limits increasing to $510,400 for much of the country in 2020. The following are the current minimum mortgage loan requirements for conventional lending.
Current minimum requirements for a conventional loan
- Down payment. The minimum down payment is 3% for conventional loans and can come from your own money or a gift from a family member.
- Mortgage insurance. Conventional loans with less than 20% down require private mortgage insurance (PMI) to protect the lender if you default. You’ll pay anywhere from 0.15% to 1.95% of your loan amount each year, although the premium can head north of 2.5% if you have a low credit score and a small down payment. The premium is normally paid as part of your monthly payment, however, it can be paid in a lump sum upfront at closing.
- Credit score. The minimum score for a conventional mortgage is 620. Higher credit scores mean you’ll likely get more favorable interest rate offers.
- Employment. Lenders require proof of steady income, and will scrutinize your employment history and income from the past two years. Self-employed borrowers and those with variable incomes will have to provide additional paperwork to verify income.
- Income. Most conventional loans do not have income limits. However, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible loans (which we’ll cover below) require that borrowers’ incomes must fall within the income limits for their area.
- Debt-to-income ratio. Your debt-to-income ratio (DTI) is a measure of your total debt divided by your gross income. Conventional lenders prefer a DTI of 45% or less, but may stretch it to 50% with higher credit scores and additional cash reserves. Borrowers with DTI ratios above 45% may be required by private mortgage insurers to have a minimum credit score of 740.
- Occupancy. Conventional financing can be used to buy a primary residence, a second home (also known as a vacation home) or an investment property that you rent out.
Current minimum requirements for HomeReady and Home Possible loans
The mortgage loan requirements for the Fannie Mae HomeReady or Freddie Mac Home Possible loan programs — conventional, low down payment programs — have extra qualifying features, such as:
- No credit score option. Homebuyers who don’t have a credit score can provide alternative data to prove their creditworthiness. For example, you can use 12 months of consecutive, on-time rent payments, as well as utility bill payments and car insurance payments, to prove that you have a consistent history of paying bills on time.
- Additional income qualification flexibility. Up to 30% of qualifying income from another person living in your household can count toward the total monthly income calculation for these loan programs. You must show documentation that proves the individual was paying rent to you (the primary borrower) over the past year.
Freddie Mac Home Possible only:
- Alternative down payment sources. Home Possible guidelines now allow for the entire down payment to come from sweat equity, which means you can contribute your DIY skills instead of cash toward your down payment.
FHA loan requirements
A mortgage backed by the Federal Housing Administration (FHA) is one of the easiest home loans to get. Because the FHA insures the mortgage, FHA-approved lenders can offer more favorable rates and terms — especially to first-time homebuyers.
In 2020, borrowers struggling to qualify for a mortgage for more expensive homes will get some relief. FHA loan limits have increased to $331,760 in 2020 in most parts of the country. Higher-cost areas may get even more FHA bang for the buck with maximum loan amounts as high as $765,600.
Current minimum requirements for an FHA loan
- Down payment. FHA requires a 3.5% minimum down payment from your own funds or a gift. The down payment requirement jumps to 10% with a credit score between 500 and 579.
- Mortgage insurance. FHA loans require two types of mortgage insurance. The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan balance due and can be rolled into your loan. You’ll also pay an annual mortgage insurance premium (MIP) as part of your monthly payment, and those costs range from 0.45% to 1.05% of the loan amount. FHA mortgage insurance premiums are the same regardless of credit score.
- Credit score. You can have a credit score as low as 500 with a 10% down payment. Homebuyers making a 3.5% down payment will need a minimum score of 580.
- Employment. FHA loan income requirements look at the consistency of earnings and employment for the last two years. Job-hoppers will need to explain changes or gaps in employment.
- Income. There are no income limits for FHA loans. However, the maximum FHA loan limit is capped at $331,760 compared to $510,400 for conventional loans in most parts of the country.
- DTI ratio. The front-end DTI ratio for FHA loans is 31% and the back-end ratio is 43%. The front-end ratio considers only housing-related costs, such as your monthly mortgage payment, property taxes and insurance. The back-end ratio looks at total debt, including mortgage payments, car loans, credit card payments and other recurring debt payments. Higher DTI ratios may be approved with strong credit scores or proof of extra cash reserves.
- Occupancy. The home must be your primary residence for at least the first year after purchasing it, regardless if it’s a single-family home or multi-unit property.
VA loan requirements
The U.S. Department of Veterans Affairs makes qualifying for a mortgage loan easier for active-duty military personnel, reservists, veterans and eligible spouses.
In 2020, VA mortgages no longer have loan limits. This means that VA borrowers might be able to buy homes with VA financing rather than a jumbo loan, or financing for loans that exceed conventional loan limits.
Current minimum requirements for a VA loan
- Certificate of eligibility. To qualify for a VA loan, you’ll need a VA loan certificate of eligibility (COE) that verifies you meet the military service requirements needed for a VA loan. Although most lenders can obtain a COE online, military personnel and veterans can apply for one online.
- Down payment. No down payment is required for a VA loan. However, lenders may require a down payment if the loan exceeds standard loan limits. Down payments can come from your own funds or a gift from a relative, a close friend, employer, charity or government agency.
- Mortgage insurance. The VA guarantees loans made to eligible borrowers, so no PMI is required.
- Funding fee. A funding fee is charged on many VA loans to defray the cost of the program to taxpayers. The amount varies based on type of service, how often the VA loan benefit has been used, and the down payment amount. Military borrowers with service-related disabilities may be eligible for a waiver. In 2020, VA funding fees have increased by 0.15% for borrowers who put down 10% or less of the purchase price. That adds up to an extra $1,500 in funding fee costs for every $100,000 borrowed.
- Credit score. There is no VA home loan credit score requirement, but VA-approved lenders typically require a 620 score.
- Employment. Generally, two years of employment needs to be verified, with some exceptions for recently discharged veterans.
- Income. There are no income limits or minimum income requirements to meet, but lenders require proof of steady income and the ability to repay the loan.
- DTI ratio. The recommended debt-to-income ratio is 41%. VA-approved lenders may approve higher DTIs if the borrower has enough residual income, or extra money left over after tax deductions, expenses and monthly maintenance costs are subtracted. The minimum amount needed varies based on your location and family size.
- Occupancy. VA loans are made only on primary residences.
USDA loan requirements
The U.S. Department of Agriculture offers a mortgage program designed to give low- to moderate-income families the ability to buy homes in rural areas. USDA mortgage loan requirements include restrictions on the location of the home as well as income limits.
Current minimum requirements for a USDA loan
- Location of home. The home must be located within one of the USDA’s designated rural areas to be eligible for a USDA loan.
- Down payment. No down payment is required for eligible USDA properties and buyers.
- Mortgage insurance. USDA loans do not require mortgage insurance.
- Guarantee fee. An upfront fee of 1% is charged for a USDA loan, along with an annual fee of 0.35% of the loan amount. These fees are similar to mortgage insurance charged on an FHA loan, with the upfront fee typically financed, and the annual fee rolled into the monthly mortgage payment.
- Credit score. USDA mortgage loans require a minimum credit score of 640 for automatic approval — provided employment and income requirements are also met. However, homebuyers with lower credit scores may still be approved if a temporary hardship (such as an illness or job loss) impacted their scores, or the new housing payment is less than what the borrower is currently paying.
- Income. Two years of job and income history is the norm for USDA loans. All household member’s income must be considered, regardless of whether or not they apply for the loan. USDA loans have income limits, which vary by city, county and family size. Find out the income limit for your area using USDA’s map tool.
- DTI ratio. The maximum front-end ratio for USDA loans is 29%, while 41% is the maximum back-end ratio. Borrowers who have higher DTI ratios may still qualify with a credit score of 680 or higher, and large cash reserves and a stable income history.
- Occupancy. USDA loans can be used for primary residences only.
Key mortgage documents
Once you’ve determined how much mortgage you qualify for and what loan program to use, it’s time to get your paperwork ready to buy a home.
To determine how much mortgage you qualify for, lenders will likely require some or all of these documents:
- Pay stubs for the last 30 days
- W-2s for the last two years
- Bank statements for the last 60 days
- Federal tax returns for the last two years
- Proof of homeowners insurance
- 1099 forms (if you’re self-employed or commissioned)
- Documented dividends, stock earnings and other sources of income
- Proof of bonus income
- Pension statements
- Securities documents such as stocks, bonds and life insurance policies
- Social Security or disability income award letters, if applicable
- Specific forms required by FHA, VA or USDA-approved lenders
- Gift letter (if any portion of your down payment is coming from a donor gift)
- A fully-signed purchase agreement
Some lenders may request written verification of your salary and position, printed on your employer’s company letterhead. They may also send a verification of employment form to your employer’s human resources department to complete.
Once you have your paperwork together, try a rate comparison site to start getting some rate quotes from lenders. After you choose a lender and get preapproved for a mortgage, you can begin looking for your dream home.