Obtaining a Mortgage Loan: Understand the Basics


Following the financial crisis in 2008, obtaining a mortgage loan became significantly more difficult. With mortgage standards being eased somewhat two years ago, it has become easier for most homebuyers to obtain a mortgage than it has been in years. Not only have Freddie Mac and Fannie Mae relaxed credit score requirements, but they have also streamlined the application process while also creating programs designed to help first-time buyers. Nonetheless, there are some standards that have to be kept in mind when applying for a mortgage loan. Therefore, it is beneficial to have a greater understanding of how this mortgage application process works and what factors are used to determine if you will be approved for a loan.

Credit Score Guidelines

To be approved for a loan that is backed by Fannie Mae and Freddie Mac, you must have a credit score of at least 620. Many lenders, however, prefer to see a score of at least 640, while the best situation is to have a score of 780 or more. If you have a score of at least 720, you likely will have very few problems with obtaining a mortgage loan. Those with a lower credit score can still obtain a loan with the help of loan programs for first-time homebuyers, such as those that are insured by the Federal Housing Administration (FHA). With an FHA loan, you can obtain a loan with a credit score as low as 500. You will, however, be required to have a higher down payment and will face higher interest rates if you go this route.

A number of factors go into determining your credit score, including the amount that you owe on outstanding loans as a percentage of available credit. Therefore, to increase your chances of being approved for a mortgage loan at the best rate possible, you might want to pay down your credit card debt first. It is not a good idea to close credit card accounts, as this can have a negative impact on your credit score.

Meeting Income Qualifications

To obtain a mortgage loan, you need to prove that you are capable of repaying your loan. Therefore, you will need to provide income documentation showing consistent income for the last two years. Paperwork showing payments and deposits as well as bank statements for the last year is beneficial. It is also best to have a two-year employment history. When proving income, you can also include what is referred to as roommate rent. Roommate rent refers to the income of tenants or family members who will also reside in the home, but you will need to provide paperwork proving the roommate arrangement. If you are self-employed, you will need to provide your tax paperwork to demonstrate how much you reported to the Internal Revenue Service as income.

Downpayment Requirements

While 20 percent is the standard downpayment amount required when obtaining a mortgage loan, it is not always necessary to have this much. A VA loan, for example, requires zero down and financial assistance programs can help with meeting the required costs for downpayments and closing costs.

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