What It Takes to Land a Mortgage These Days

Carla Fried

Whenever I read or see yet another report about sagging home values and a slow recovery--which is about every other week these days---I keep catching myself thinking about one of my favorite musings from Warren Buffett: Be fearful when others are greedy and greedy when others are fearful. Warren was obviously talking about stock investing, not home buying, but his advice seems particularly apt for anyone considering buying a home these days. If you intend to stay in the home for at least five to seven years--and the longer the better--the ability to get in today at a low price, plus the record-low mortgage rates makes it a compelling time to buy in. You pay less when the general sentiment is fear rather than greed.

That said, landing a mortgage has become a lot trickier the past few years. It’s become a lot like gaining admission into a top-flight college; fail to impress and you will be turned down.


Here’s what it takes to land a mortgage these days:


A down payment of at least 3.5 percent. That’s the absolute minimum down payment required for an FHA-insured loan. And indeed, FHA-insured loans have become quite popular the past few years as the program has been expanded to allow mortgages for as much as $729,750 in high-cost areas. (Find the FHA loan limit in your area.) But with that low down-payment you’ll also have to pay mortgage insurance that adds to your monthly costs. If you want to stick with a conventional mortgage you’ll need to hand over a down payment of at least 10 percent. And if you really want to win over the lender come to the table with 20 percent down. Lenders who were once all too glad to ply borrowers with zero-down offers have now swung to the other extreme and are eager to make sure you have a big fat equity cushion.


A nice wad of cash in your bank account. Okay, the down payment is the first hurdle. Next up: Lenders will be poking around your financial records to see what sort of backup savings you have to cover your mortgage payment if your income took a hit. Lenders were just as spooked by the Great Recession as us ordinary folk; until we see the unemployment rate come down and the economy growing at a strong pace, lenders are going to err on the side of super safety. That means you need to convince them you could handle a temporary layoff, or furlough, or a downturn in your own business. There’s no hard and fast rule here, but if you’ve got just a two-month emergency fund it’s not going to engender as much confidence in your loan-ability as a four-, five- or six-month cushion.


A sparkling credit score. Sure, credit scores have always been a factor. But while your credit score once just determined the interest rate and loan terms you would be offered, in today’s marketplace, a low credit score can disqualify you, period. Risk is indeed a four letter word in lender-circles these days. You’ll have the easiest time getting a green light with a FICO credit score that is at least 700. If you have your sights on nabbing the best interest rate you will want to show up with a FICO score of 740 or better.


Patience. The pendulum among lenders has swung from lax to laser-focused. Where it was once quick and easy to get a mortgage it is now a more drawn out process that will require you to hand over volumes of supporting documents to make your case. If you work for an employer, you will need pay stubs to verify your income. Self-employed? Be prepared to hand over copies of your tax returns for the two most recent years. And everyone will be asked to share months of bank statements and brokerage statements. Patience is one of your most valuable assets when shopping around for a mortgage these days.