If you’re aiming to become a first-time homebuyer this year, you’ll need to know the minimum mortgage requirements for 2021. While most types of mortgage companies look for the same requirements (like a good credit score, reliable employment, and acceptable debt-to-income ratio) the specific qualifications can vary greatly.  

(Note: The minimum mortgage requirements listed in the article may not directly relate to Vast Bank underwriting.)

Loan requirements can be confusing. Here’s a simple summary of the minimum mortgage requirements for 2021, broken down by type of loan:

A conventional loan is a mortgage that is not provided or insured by any government agency. You’ll need:

• A minimum FICO score of around 640. 
• A debt-to-income ratio at or below 45%. Applications with excellent credit (over 700) may be accepted with a higher debt-to-income ratio.
• Down payment amounts are flexible if you include private mortgage insurance (PMI), which is a premium you’ll pay each month that protects your lender in case of default.

An FHA loan is a mortgage issued by a Federal Housing Authority-approved lender.  FHA loans are designed for buyers with low to moderate income levels and lower credit scores, a typical financial situation for a first time homebuyer. The minimum mortgage requirements for 2021 did tighten a bit for FHA applicants. Requirements include: 

• A debt-to-income ratio of 31% or less (before future housing costs are factored in)
• No delinquent federal debts. This includes student loans, taxes, and even child support.
• Minimum down payment of 3.5% of the home’s value.
• Credit score of 500 or above. HOWEVER, this depends on your down payment amount. For example, with 3.5% down, you could be approved with a FICO score of 580 or above. With 10% down, the minimum credit score is 500. 
• Maximum loan amount varies by location. 

A USDA loan is backed by the US Department of Agriculture through its USDA Rural Development Guaranteed Housing Loan Program. This is a common loan type for first time homebuyers. As the name suggests, the loans are intended to keep rural areas populated, and requirements are more lenient with that goal in mind:

• No minimum credit score: applicants with credit scores below 640 (or even no scores at all) go through a more stringent qualification process, but may still be approved. This depends on the USDA-backed lender.
• Maximum yearly income increased in 2019 to $86,850 for a household of four or fewer members, meaning more households are eligible. This number can be higher if you are shopping in a high-cost area.
• Debt-to-income ratio at or below 41%.

Home purchase must be in a rural area, but the definition of “rural” is pretty relaxed. Many suburbs qualify for USDA loans.

A VA loan supplies mortgage financing to eligible veterans, backed by the United States Department of Veteran Affairs. To qualify for a VA loan, here are the requirements: 

• Applicants must meet service eligibility conditions and procure a VA loan certificate of eligibility 
• No down payment is required, nor is private mortgage insurance.
• While the VA loan program itself has no minimum FICO score, most lenders that fund the loans place the minimum score at 620.
• No minimum income minimum, but applicants must demonstrate steady and reliable incomes
• Debt-to-income ratio maximum of 41%.
• No loan limit.

Although the minimum mortgage requirements for 2021 may seem daunting at first, the sheer number of options makes one thing clear: you’re so close to becoming a homeowner! A great way to get started is by reaching out to a professional at your trusted local bank for a one-on-one information session to see you through the next steps. 

References

• Amy Fontinelle (June 2019) 5 Types of Private Mortgage Insurance - PMI
• Dan Rafter (May 2017) 3 Ways Student Loan Debt Can Affect Your Mortgage Application
• Beth Buczynski (Aug 2019) FHA Loan Limits for 2019
• Brian Martucci (undated) USDA Home Mortgage Loans for Rural Development – Eligibility Requirements
• Barbara Marquand (Aug 2019) VA Home Loan Limits to Disappear, Fees to Rise