The Mortgage Approval Process: What You Need To Know

Getting a mortgage can be a stressful process, requiring a lot of paperwork and complicated procedures. The type of mortgage you can get approved for depends on several factors, including your credit score, down payment, and income. For example, a conventional mortgage typically requires a minimum credit score of 620 and a down payment of 3%. FHA loans, which are backed by the Federal Housing Authority, have more relaxed credit requirements and allow for lower down payments, but you must also meet location and income requirements. On the other hand, VA loans are only available to current or former service members, but they don't require a down payment.

Credit score requirements

Credit scores are a significant factor in determining eligibility for mortgages. While the specific credit score requirements can vary by lender and mortgage type, it is generally necessary to have a credit score to qualify for a home loan. FHA loans have a lower credit score requirement than most other home loans. With an FHA loan, a credit score of 500 is the minimum required for approval, but the borrower must put down at least 10%. Additionally, a minimum credit score of 580 allows for a minimum down payment of 3.5%.

Conventional mortgages typically require a higher credit score than FHA loans. For example, a conventional mortgage from Citibank requires a minimum credit score of 620 and a minimum down payment of 3%. In contrast, the HomeRun mortgage from Citibank offers approval with as little as 3% down and no private mortgage insurance. However, the minimum credit score for this specific mortgage type is not disclosed.

The Department of Veterans Affairs (VA) offers home loans with no down payment requirement for former or current service members. While these VA loans have flexible down payment and credit score requirements, they are exclusively available to those who meet the eligibility criteria. Similarly, the USDA offers loan programs with lenient credit score requirements, but they are restricted by income and location prerequisites.

Although credit score is a crucial factor, other aspects, such as income, debt-to-income ratio, and property location, also play a role in mortgage approval. It is worth noting that having a co-signer with good credit can be beneficial, but it also carries financial responsibility for the co-signer if the borrower fails to make payments.

Down payment amounts

The down payment amount is a crucial factor in mortgage approval. It represents the percentage of the home's purchase price that you pay upfront when closing your home loan. Lenders consider this amount as your investment in the home, and it can influence the interest rate offered to you.

Lenders typically require a 20% down payment for a conventional loan. However, this is not a mandatory requirement, and many first-time homebuyers put down less. In 2023, the average down payment for first-time homebuyers was 8%, according to the National Association of Realtors. Repeat buyers had an average down payment of 19%.

The down payment amount can vary depending on several factors, including the type of mortgage, the lender, and your financial situation. For example, Federal Housing Administration (FHA) loans require a minimum down payment of 3.5% with a credit score of 580 or higher. If your credit score is between 500 and 579, the minimum down payment increases to 10%. On the other hand, U.S. Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans do not require any down payment, although they have specific eligibility criteria.

It's important to note that a larger down payment can provide benefits such as a lower interest rate and reduced monthly mortgage payments. A higher down payment also indicates to lenders that your finances are in order, making you a more attractive borrower. Additionally, if your down payment is less than 20%, your lender may require you to pay for private mortgage insurance (PMI), which increases your monthly payments.

When deciding on a down payment amount, it's essential to consider your financial situation and the lender's requirements. Certain lenders offer programs that provide down payment assistance, so it's worth asking if you qualify for such programs. Ultimately, the down payment amount you choose will impact your monthly budget and overall financial commitments.

Government-backed loans

The Federal Housing Administration (FHA) manages the FHA loan program, which helps homebuyers by insuring their loans so lenders can offer lower down payments and closing costs. FHA loans are geared toward low- and moderate-income households, especially first-time homebuyers, and have more relaxed credit criteria. They are also available to seniors who partially or fully own their homes and those buying manufactured or mobile homes. FHA loans require an upfront premium of around 1.75% of the loan amount, as well as ongoing monthly insurance payments of 0.15% to 0.75% of the loan amount.

The U.S. Department of Agriculture (USDA) offers loans for those looking to buy homes in suburban or rural areas. These loans do not require a down payment but typically require a minimum credit score of 640. The property must also be in an eligible rural area, which can be checked on the USDA's Eligibility Map.

The U.S. Department of Veterans Affairs (VA) backs loans for eligible veterans, active-duty military personnel, National Guard personnel, reservists, and qualifying surviving spouses. VA loans typically do not require a down payment, but the homebuyer must still pay closing costs. While the VA does not set a minimum credit score, individual lenders may have their own requirements, with some accepting scores as low as 580. A valid certificate of eligibility (COE) is required as proof of qualification for a VA loan.

Mortgage types

There are several types of mortgages available, each with its own benefits and features. The right mortgage for you will depend on your credit score, finances, and long-term housing plans. Here are the five main types of mortgages:

Conventional Loans:

These are the most common type of mortgage and are offered by private banks. They are best for borrowers with good credit scores. There are two types of conventional loans: conforming and non-conforming. Conforming loans meet a set of Federal Housing Finance Agency (FHFA) standards, including guidelines on credit, debt, and loan size. They are eligible to be purchased by government-sponsored enterprises like Fannie Mae and Freddie Mac. Non-conforming loans, on the other hand, do not meet these standards and are considered riskier for lenders. A common type of non-conforming loan is a jumbo loan, which exceeds the conforming loan limit.

Jumbo Loans:

These are a type of non-conforming conventional loan that allows borrowers to finance a more expensive property. However, they come with more qualifying criteria and higher borrowing costs, such as a larger minimum down payment and higher closing costs. Jumbo loans typically require a high credit score and a low debt-to-income ratio.

Government-Backed Loans:

These loans are insured by federal agencies like the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA). They are designed for borrowers with lower credit scores and minimal cash for a down payment. FHA loans, for example, can be obtained with a credit score as low as 500 and a 10% down payment. VA loans are available to eligible members of the U.S. military, veterans, and their spouses. Government-backed loans often have more favourable requirements, fees, and terms, but they may also have strict limits on the loan amount.

Fixed-Rate Mortgages:

With this type of mortgage, the interest rate remains fixed for the duration of the loan, usually 15 or 30 years. This results in stable monthly payments, making it a good option for borrowers who prefer predictability and certainty in their loan costs. While the interest rate stays the same, the total monthly payment can still change due to fluctuations in property taxes, homeowner's insurance, or mortgage insurance.

Adjustable-Rate Mortgages (ARMs):

In contrast to fixed-rate mortgages, adjustable-rate mortgages have interest rates that can go up or down regularly based on market changes. ARMs typically have two periods: an introductory period with a fixed interest rate, followed by a second period with variable rates. This type of mortgage may be preferred by borrowers who are not planning to stay in the home for an extended period or those who are comfortable with possible fluctuations in their monthly payments.

Additional costs

When it comes to mortgages, there are several additional costs to be aware of beyond the down payment and monthly repayments. These extra expenses can add up, so it's important to factor them into your financial planning when considering a mortgage.

One significant additional cost is closing costs, which typically range from 2% to 5% of the final sales price. These cover various fees and charges associated with processing the mortgage, such as loan origination fees, appraisal fees, and attorney fees. Some lenders may offer assistance with closing costs, so it's worth exploring different options and negotiating where possible.

Another important consideration is mortgage insurance, which is typically required if your down payment is less than 20% of the property's value. This insurance protects the lender in case you default on your loan, but it's an extra ongoing cost that can increase your monthly payments. Private mortgage insurance is often necessary for conventional loans, while government-backed loans like FHA loans may offer lower insurance costs.

Property taxes and homeowners insurance are also significant ongoing expenses that will impact your overall affordability. Property taxes can vary depending on the location and value of your home, and they are typically paid through your monthly mortgage payment. Homeowners insurance, which covers potential risks like fire or theft, is another necessary cost that can increase your monthly outgoings.

Finally, when purchasing an older home, it's essential to consider potential hidden costs associated with maintenance and repairs. Older properties may have underlying issues that require costly repairs, so it's wise to factor this into your budget to avoid unexpected financial strain.

Frequently asked questions