Getting approved for a home loan comes down to five things: your credit score, your income and employment history, your debt relative to your earnings, your down payment and cash reserves, and the condition of the property you want to buy. Lenders evaluate all five together, so strength in one area can sometimes offset weakness in another. Here’s what you need across each category and how to position yourself for approval.
Credit Score Minimums
For a conventional mortgage backed by Fannie Mae or Freddie Mac, you need a minimum credit score of 620 for a fixed-rate loan and 640 for an adjustable-rate mortgage. FHA and VA loans also require a 620 when the loan is sold to Fannie Mae, though FHA’s own guidelines allow scores as low as 500 with a larger down payment. In practice, most lenders set their own cutoffs above the absolute minimums, and a higher score gets you a better interest rate.
Your credit score is pulled from all three major bureaus, and lenders use the middle score. If you’re applying with a co-borrower, the lender typically uses the lower of the two middle scores. Before you apply, check your reports for errors or old debts you can resolve. Even a 20-point improvement can shift your rate enough to save thousands over the life of the loan.
Income and Employment History
Lenders want to see that your income is stable and likely to continue. For W-2 employees, that generally means at least two years of consistent employment history in the same field. You don’t need to have been at the same company for two years, but gaps or frequent industry changes raise questions.
If you’re self-employed, the bar is higher. Fannie Mae requires a two-year history of self-employment earnings, verified through two years of signed personal and business federal tax returns (or IRS transcripts). The lender runs your returns through a cash flow analysis to calculate your actual qualifying income, which is often lower than your gross revenue because business expenses and deductions reduce the number. If your business has existed for at least five years and you’ve held 25% or more ownership that entire time, some lenders will accept just one year of tax returns.
There’s a narrow exception for newer businesses: if you have less than two years of self-employment but your most recent tax return shows a full 12 months of income, and you can document prior earnings at the same level in the same field (for example, you were a salaried software developer before launching a software consulting firm), the income may still count.
Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward debt payments. Lenders look at two versions. The “front-end” ratio counts only your projected housing costs (mortgage payment, property taxes, insurance, and any HOA dues). The “back-end” ratio adds in all other monthly obligations: car loans, student loans, credit card minimum payments, and any other recurring debt.
Most conventional loans cap the back-end DTI at 45% to 50%, depending on the strength of your overall application. FHA loans are sometimes more flexible, allowing DTI ratios up to 57% for borrowers with compensating factors like a large down payment or significant cash reserves. The math is simple: if your gross monthly income is $8,000, a 45% DTI cap means your total monthly debt payments, including the new mortgage, can’t exceed $3,600.
Paying down credit cards or car loans before you apply is one of the fastest ways to improve your DTI. Even closing out a small monthly payment can shift the ratio enough to qualify for a larger loan or a lower rate.
Down Payment Requirements
The minimum down payment depends on the loan type. Conventional loans require as little as 3% for first-time buyers and 5% for repeat buyers on a primary residence. FHA loans allow 3.5% down with a credit score of 580 or higher. VA loans and USDA loans offer zero-down options for eligible borrowers.
Putting down less than 20% on a conventional loan triggers private mortgage insurance (PMI), which adds a monthly cost until you build enough equity. FHA loans carry their own version, called a mortgage insurance premium, which stays on for the life of the loan if you put down less than 10%.
Your down payment can come from savings, gifts from family, or certain down payment assistance programs. Lenders will trace the source of your funds, so large deposits that appear in your bank account shortly before you apply will need a paper trail showing where the money came from.
Cash Reserves After Closing
Reserves are the funds you have left after paying your down payment and closing costs. Lenders measure reserves in months, meaning how many months of mortgage payments (principal, interest, taxes, and insurance) you could cover with your remaining liquid assets.
For a one-unit primary residence with a conventional loan, there’s no minimum reserve requirement. But for a second home, expect to need at least two months of reserves. Investment properties and two-to-four-unit primary residences require six months. If you own multiple financed properties, you’ll need additional reserves equal to 2% to 6% of the combined outstanding balances on those mortgages, depending on how many properties you have.
Acceptable reserve sources include checking and savings accounts, retirement accounts (usually counted at 60% of their value to account for penalties and taxes), and investment accounts.
Documents You’ll Need to Provide
The mortgage application process is document-heavy. Gathering everything before you apply speeds up the timeline significantly. Here’s what to have ready:
- Proof of income: Your most recent pay stubs covering at least 30 days of earnings and year-to-date totals. If you’re paid weekly, that means four consecutive stubs. Self-employed borrowers need two years of signed personal and business tax returns.
- Tax returns: Your most recent signed federal tax return, all pages and schedules included. Lenders may also pull IRS transcripts directly to verify what you filed.
- Bank and investment statements: Two months of statements from every account you’ll use for the down payment, closing costs, or reserves. Include all pages, even blank ones.
- Identification: A government-issued photo ID such as a driver’s license or passport.
- Housing history: Your current mortgage statement or landlord contact information for rental verification.
If someone lives in the home with you and contributes to household expenses but won’t be on the loan, the lender may require their tax returns and income documentation as well, along with a credit authorization form.
The Property Has to Qualify Too
Your finances are only half the equation. The property itself must meet the lender’s standards, verified through a professional appraisal. The appraiser evaluates the home’s market value and its physical condition, rating it on a scale from C1 (new construction) to C6 (severe damage or structural problems).
Properties rated C6, meaning they have defects serious enough to affect safety or structural integrity, are not eligible for conventional financing at all. Any issues that compromise the home’s safety or soundness must be repaired before the loan can close. Common problems that trigger repair requirements include a failing roof, faulty electrical systems, water damage, mold, foundation cracks, and the presence of hazardous materials like lead paint or asbestos.
The appraisal also confirms that the home is worth at least what you’re paying for it. If the appraised value comes in below your purchase price, the lender won’t finance the difference. At that point, you can renegotiate the price with the seller, make up the gap with additional cash, or walk away if your contract allows it.
How Preapproval Fits In
Before you start house hunting, getting preapproved gives you a clear picture of how much you can borrow and signals to sellers that you’re a serious buyer. During preapproval, the lender reviews your credit, income, assets, and debts, then issues a letter stating the loan amount you qualify for.
Preapproval is not a guarantee. The final approval, called underwriting, happens after you’ve chosen a property and the lender has verified everything with updated documents and a satisfactory appraisal. Keep your finances stable between preapproval and closing: avoid opening new credit accounts, making large purchases, or changing jobs during that window, as any of those can derail your approval.