Before verifying any of your other qualifications, lenders will typically run a credit check. Virtually all mortgage lenders use the FICO credit scoring model, and most will pull your scores from all three major credit bureaus and use the middle number for qualification purposes. FHA loans require a minimum 580 FICO® Score for a 3.5% down payment, while conventional loans have a minimum of 620.
Unless you’re using a VA or USDA loan to finance your home, you’ll need a down payment. FHA and conventional loans have low down payment options, and funds can usually come from a gift. But you’ll need to document what funds you have for your down payment and where they came from, as well as how you plan to pay for any closing costs.
Simply put, lenders want to make sure you’ll be able to afford your mortgage payments, so they’ll look at your debt obligations as a percentage of your income, a metric known as your debt-to-income ratio, or DTI ratio. Methods of calculating DTI and lending standards can vary, but a good rule of thumb is that your total monthly debt obligations (including your new mortgage payment) should be no more than 45% of your pre-tax income. However, there are exceptions, so if you feel you can comfortably afford to have a higher DTI ratio, don’t be discouraged. In fact, FHA lenders will allow you to have a DTI as high as 57% in some cases!
Lenders want to know that not only can you afford your mortgage payments for now, but that you’ll also be able to keep paying your mortgage year after year. Most mortgage lenders want to see at least two years of steady employment in the same field (but not necessarily with the same employer). There are exceptions, however — such as if you graduated from college less than two years ago.
Depending on the mortgage loan you select, as well as your other qualifications, your lender is likely to require a certain amount of money in reserves. This can be as little as two months’ worth of mortgage payments. The point is that you typically can’t end up with a zero balance in your bank account after closing on your home.
Before you apply for a mortgage, it makes sense to ensure each of these are as good as possible. For example, taking some time to raise your credit score and save a higher down payment could help you snag a better interest rate, which will save you money in the long run.
The first step in choosing the best mortgage lender for your first home purchase is to get a good understanding of how home loans work. Then you’ll need to narrow down a short list of a few (say, three or four) lenders with products and resources that meet your needs. Our best first-time mortgage lender list on this page is a good place to start, but it could also be a smart idea to check out your local and regional banks or credit unions so that you can compare mortgage rates. If you’re looking for a digital application process, be sure to check out our list of the best online mortgage lenders.
Once you have a short list, apply for a mortgage with all of them to compare the specific loan terms and fees that you get offered. It won’t hurt your credit score to do this, as all mortgage-based credit inquiries that take place within a typical shopping period are counted as just a single inquiry. You’ll see a range of interest rates, fees, and APRs from different lenders, and you’d be surprised at how much this can save or cost you over the life of a 30-year mortgage loan.