Minimum Mortgage Requirements in 2023

If buying a home is on your wish list for 2023, you should know the minimum mortgage requirements for the most common loan programs available.

Conforming and FHA loan limits have increased again, giving homebuyers extra borrowing power as home prices remain persistently high. Although minimum mortgage requirements will remain largely the same as last year, Fannie Mae changes to how rates are priced and FHA changes to mortgage insurance could have an impact on your mortgage interest rate.

2023 minimum mortgage requirements by loan type

Below is a snapshot of the new loan limits, along with the basic mortgage requirements.

Conventional mortgage requirements

Conventional loans, which remain the most popular mortgage option, aren’t guaranteed by any government agency. Instead, lenders that offer conventional home loans follow rules set by government-sponsored enterprises Fannie Mae and Freddie Mac, which tend to be more stringent than those set by agencies that support government-backed loans.

Fannie Mae rate updates

Fannie Mae announced major changes that will impact how mortgage lenders price your interest rates after May 1, 2023. Borrowers with high credit scores and large down payments may see an increase in offered rates versus the current pricing system.

Homebuyers will have more conventional mortgage borrowing power in 2023, with conforming loan limits increasing from $647,200 to $726,200 for a single-family home in most parts of the country. More homebuyers may have a shot at conventional loans with new changes to how lenders calculate qualifying credit scores. Plus, borrowers looking for cheaper housing options can now finance a single-wide mobile home with a conventional loan.

Current minimum mortgage requirements for conventional loans

Down payment. You’ll need at least a 3% down payment for a conventional loan. The funds can come from a gift or your own money.

Mortgage insurance. Conventional loans with less than 20% down require private mortgage insurance (PMI) to protect lenders if you default. The higher your down payment and credit score, the lower your PMI will be. You may pay between 0.14% and 2.33% of your loan amount in annual PMI premiums. PMI premiums are normally paid as part of your monthly payment; however, PMI can be paid upfront in a lump sum at closing.
Credit score. Conventional mortgage guidelines require a minimum 620 credit score. You’ll snag the best mortgage rates and lower PMI premiums with credit scores of 780 or higher.

  GUIDELINE UPDATE: AVERAGE MEDIAN CREDIT SCORING

Lenders are now allowed to take an “average median score” to meet the minimum credit score, which is great news for borrowers that need two incomes to qualify but one applicant has a score below the 620 minimum. In the past, that meant a loan denial for a conventional loan. Now, a high-credit-score borrower can potentially lift a low-credit-score borrower over the 620 threshold, which could lead to a loan approval “thumbs up.”

New credit score standard for best conventional rates

The new benchmark for the best available conventional rates has increased to 780 or higher. That’s 40 points higher than the previous “best-rate” standard of 740.

Employment. Lenders require proof of steady income and need to verify the income is likely to be predictable in the future. You’ll typically need to document two or more years of variable income earned from commissions, bonuses or overtime.

Self-employment. If you run your own business, Fannie Mae and Freddie Mac usually require two years’ worth of personal and business federal tax returns. Some lenders may bypass the self-employed tax return requirement by electronically verifying the information from your returns directly with the IRS.

Income limits. With the exception of Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® (covered below), most conventional loans don’t have income limits.

Debt-to-income ratio. Lenders measure your debt-to-income (DTI) ratio by dividing your total debt by your gross monthly income. Conventional lenders prefer a DTI of 45% or less but may bump it to 50% with higher credit scores and additional mortgage reserves.

Cash reserves. Also called mortgage reserves, these are rainy-day funds you’ll need — in addition to your down payment and closing costs — to cover several months of mortgage payments in an emergency. Lenders may require proof of up to six months of cash reserves depending on your credit scores, DTI ratio and down payment, and in the event that you’re buying a two- to four-unit home.

Occupancy. One big advantage of conventional loans over government-backed loan programs is that borrowers can purchase a second home (commonly called a vacation home) or rental property. Government-backed loan programs only allow you to finance a primary residence you live in full time.

Rate improvements for rental properties

If you own or plan to purchase a rental property, your interest rate may be lower with the new pricing changes, as conventional investment property rate adjustments will be reduced. The rate you pay to buy or refinance a multifamily two- to four-unit home may also be cheaper due to the new Fannie Mae pricing adjustments

Property types. Conventional mortgage requirements allow you to finance a one- to four-unit home located in a regular subdivision, condominium project, co-op project or planned unit development (PUD), and manufactured homes built on a permanent foundation.

  GUIDELINE UPDATE: SINGLE-WIDE MOBILE HOME FINANCING

To help homebuyers with more affordable home choices, Fannie Mae and Freddie Mac allow mortgages on single-wide mobile homes with a permanent foundation, in addition to regular manufactured home and land financing.

Home appraisals. Conventional loan guidelines typically require a home appraisal, which is an unbiased opinion of a home’s value from a licensed property appraiser. Borrowers making at least a 20% down payment on a one-unit home may be eligible for a property inspection waiver (PIW) and can skip a home appraisal.

  GUIDELINE UPDATE: HOME APPRAISAL ALTERNATIVES

Changes to Fannie Mae appraisal guidelines may eliminate the need for a full appraisal on many transactions. Instead, new automated valuation models and certifications by trained inspectors may be acceptable. Ask your loan officer what alternative appraisal options are available to you.

Current minimum mortgage requirements for HomeReady and Home Possible loans

In addition to standard requirements above, you’ll need to meet a few extra requirements to be approved for a HomeReady or Home Possible loan.

Income limits. These conventional, 3%-down-payment programs are the only conventional loans with strict income limits. You determine the maximum income based on your address using Fannie Mae and Freddie Mac online lookup tools:

• For Fannie Mae HomeReady loans, use the Area Median Income Lookup Tool
• For Freddie Mac Home Possible loans, use the Income and Property Eligibility Tool

Homebuyer education. HomeReady and Home Possible borrowers must complete a homebuyer education course before closing. Homebuyers applying for the HomeReady program won’t be required to use Fannie Mae’s homebuyer education program.

Both programs offer some extra wiggle room to help you qualify, including:

Flexibility for borrowers with no credit score. Homebuyers without a credit score can prove their creditworthiness with alternative data. For example, lenders may accept 12 months of consecutive, on-time rent payments, along with utility bills and car insurance payments, to prove your history of paying bills on time.

Adding income from a long-term roommate: You can add rental income received from someone who has lived with you for at least 12 months to help qualify for a HomeReady loan. This is called “boarder income” and to use it, you’ll need proof the person has lived with you for a full year.

Freddie Mac Home Possible only

Alternative down payment sources. Home Possible guidelines allow for the entire down payment to come from sweat equity, which means you can convert your DIY skills — rehabbing a home that needs improvements — into cash toward your down payment and closing costs.

  GUIDELINE UPDATE: SWEAT EQUITY CHANGES

The HomeReady program will match the Home Possible guidelines by allowing qualified borrowers to make their entire down payment with sweat equity. The previous guideline limited sweat equity to only 2% of the required down payment.

FHA mortgage requirements

It may be easier to qualify for a mortgage backed by the Federal Housing Administration (FHA) than a conventional loan. FHA-approved lenders are protected against losses when you pay for FHA mortgage insurance. This extra insurance allows lenders to make loans to borrowers with lower credit scores and more debt than conventional loans, because their losses are paid by the insurance if the borrower defaults.
Borrowers struggling to qualify for a mortgage will have more FHA buying leverage in 2023: FHA loan limits increased to $472,030 for most parts of the country. Higher-cost areas get even more bang for the buck, with maximum loan amounts as high as $1,089,300.

Current minimum mortgage requirements for FHA loans

Down payment. The minimum down payment is 3.5% with a credit score at or above 580, or 10% with a score between 500 and 579.

You'll pay lower annual FHA MIP

The annual MIP was reduced on March 20, 2023, and the ranges above represent a 30-basis-point reduction in the cost. That saves an FHA borrower making a minimum 3.5% down payment more than $80 per month on a $350,000 mortgage.

Mortgage insurance. FHA borrowers must pay two types of FHA mortgage insurance. The first is an upfront mortgage insurance premium (UFMIP) worth 1.75% of the loan amount, which is typically financed into the mortgage. The second is the annual mortgage insurance premium (MIP), which ranges from 0.15% to 0.75% of the loan amount, is divided by 12 and added to your monthly payment.

Credit score. FHA loan guidelines set the lowest minimum credit score requirements of any standard loan program, allowing scores as low as 500 with a 10% down payment. A 580 score is required for borrowers making a minimum 3.5% down payment. FHA-approved lenders also use the Credit Alert Verification Reporting System, or CAIVRS for short, to confirm you don’t have any delinquent federal debt like student loans.

Employment. FHA lenders must look at the borrower’s income stability and employment history for the past two years. Job-hoppers and borrowers with gaps in their job history who apply for an FHA loan may have to provide extra documentation and explanations.

Self-employment. You’ll need to document at least two years of self-employment for an FHA loan.

Income limits. FHA guidelines don’t set any limits on qualifying income for an FHA loan.

Debt-to-income ratio. For FHA loans, the front-end DTI ratio max is 31%, while the back-end DTI ratio is capped at 43%. The front-end ratio only considers your mortgage PITI payment (principal, interest, taxes and insurance). The back-end ratio looks at your mortgage payment, plus all other revolving monthly debt, including car loans, credit card payments and other loans. You may be approved for a higher DTI ratio with strong credit scores or extra cash reserves.

  GUIDELINE UPDATE: ENERGY-EFFICIENT DEBT EXCEPTION

If you’re buying an energy-efficient home, you may qualify with a debt ratio as high as 45% and a credit score as low as 580.

Cash reserves. FHA loan qualifications don’t usually require cash reserves unless you’re buying a two- to four-unit home or trying to qualify with a lower credit score.

  GUIDELINE UPDATE: CASH RESERVES FROM A CASH-OUT REFINANCE

Unlike conventional loan guidelines, FHA rules allow you to use money from an FHA cash-out refinance toward required reserves.

Occupancy. You can only take out an FHA loan to buy a primary residence you intend to live in for at least one year.

Property types. An FHA loan can be used to finance one- to four-unit homes, FHA-approved condominiums, cooperative units and manufactured homes affixed permanently to land.

Home appraisals. You’ll need an appraisal to buy a home with an FHA loan regardless of down payment. FHA appraisal guidelines have stricter safety and habitability requirements, and FHA appraisals are more expensive than conventional home appraisals.

VA mortgage requirements

The U.S. Department of Veterans Affairs (VA) makes qualifying for a home loan easier with no-down-payment VA loans for military borrowers including active-duty personnel, reservists, veterans and eligible surviving spouses.

The VA doesn’t set loan limits, which means VA borrowers may be able to buy higher-priced homes. This gives military borrowers an edge over non-military borrowers who may need complicated and pricey jumbo loans (loans that exceed conventional conforming limits) to buy homes in expensive parts of the country.

Current minimum requirements for VA loans

Down payment. The VA loan program doesn’t require a down payment. However, you may need one if you try to buy a new home while you own another VA-financed home that won’t be paid off by closing.

Mortgage insurance. No mortgage insurance is required on VA loans, regardless of your down payment. Instead, you’ll pay a VA funding fee between 1.40% and 3.60% depending on your down payment and whether you’ve used your home loan benefits before.

Credit score. VA guidelines don’t set a minimum credit score, though 620 is the lowest score many VA-approved lenders will accept.

Employment. You’ll need a two-year history of employment, although VA guidelines give some flexibility if your employer verifies the income is stable and likely to continue in the future.

Self-employment. The VA guidelines are similar to conventional lending guidelines for self-employed borrowers, and include requirements for two years’ worth of personal and business tax returns and an up-to-date balance sheet and profit and loss statement.

Income. VA borrowers need to prove they earn stable income that covers not only their mortgage and other monthly debt but also living expenses based on their family’s size, the loan size, the region of the country they live in and the expected maintenance expenses on the home.

Residual income. The VA calculates how much extra money is left over in a veteran household after standard paycheck deductions and a maintenance expense calculator based on the square footage of the home. The result is called “residual income,” and the amount required varies based on where you live and your family size.

Debt-to-income ratio. The maximum DTI ratio the VA will accept is 41%, according to VA guidelines. However, lenders may approve a loan with higher DTI ratio if the residual income is at least 20% above the guideline.

Cash reserves. Most VA loans don’t require cash reserves. However, you may need reserves equaling three to six months’ of your monthly payments if you’re buying a multiunit property or renting out your current home while purchasing a new one.

Occupancy. You must live in a home to finance it with a VA home loan.

Property types. You can finance a single-family home, condominium, manufactured home or two-to four-unit home with a VA loan.

Home appraisals. VA-approved lenders must order appraisals through the VA’s online system. The VA appraisal can only be completed by a VA-approved appraiser to verify the property meets minimum VA property standards. Appraisal waivers aren’t permitted for VA loans as they are for conventional mortgages.

USDA mortgage requirements

Loans guaranteed by the U.S. Department of Agriculture (USDA) are designed to help low- to moderate-income borrowers buy homes in eligible rural areas with no down payment. Unlike FHA and conventional loans, there are no set loan limits. However, strict income, location and square footage limits typically result in maximum loan amounts well below the current FHA and conforming loan limits.

Current minimum mortgage requirements for USDA loans

Down payment. The USDA loan doesn’t require a down payment.

Mortgage insurance. Rather than mortgage insurance, USDA loans require guarantee fees that work much like FHA mortgage insurance. You’ll pay an upfront guarantee fee of 1% of your loan amount, which is typically rolled into your mortgage. You’ll also pay an annual fee worth 0.35% of your loan amount that’s divided by 12 and added to your monthly mortgage payment.

Credit score. The USDA doesn’t set a minimum score, but USDA-approved lenders usually require at least a 640 score to qualify.

Employment. The USDA requires documentation of employment for all adult members of a household.

Self-employment. Self-employment guidelines require a two-year history, along with a year-to-date profit and loss analysis and proof the business is still operating.

Income. There are two unique income-qualifying requirements with USDA loans:

Your income can’t exceed specific limits. If you earn more than 115% of the median household income in your area, you won’t qualify for a USDA mortgage. Use the income eligibility search tool to check on the limits in your state.

Your total household income is counted, including non-borrowers. All family member incomes must be included in the calculations to make sure the total income is at or below your neighborhood income limits.

Debt-to-income ratio. The DTI limit is set at 41%, with exceptions up to 44% with a 680 credit score, cash reserves and job stability for the past two years.

Cash reserves. USDA loans don’t typically require cash reserves unless you’re applying for an exception for a high DTI ratio.

Occupancy. The USDA only allows financing on primary residences.

Property location. Your home search will be limited to USDA-designated rural areas to be eligible for a USDA loan. Check the USDA’s property eligibility link to see if a home you’re interested in is eligible for USDA financing.

Square footage limitations. USDA-financed properties are generally capped at 2,000 square feet, with a guideline minimum of 400 square feet.

Property types. Single-family homes, manufactured homes and condos in rural-designated areas can be financed with a USDA loan. Certain conditions apply to manufactured homes, and there are limits on how land can be used for producing income.

Home appraisals. The USDA nearly always requires an appraisal, and doesn’t offer any appraisal waiver options for purchase loans.

Special minimum mortgage requirements for second homes and investment properties

If you’re looking for a second home, your only choice is conventional financing — FHA, VA and USDA loans can’t be used for second home financing. There are also additional requirements if you’re buying an investment property or a two- to four-unit home.

Second home loan requirements

The following guidelines apply to second home purchases:

• You must live in the home for part of the year
• You can only purchase a one-unit home
• You must be able to live in the home year round
• The property can’t be managed by another company or used as a rental home
• You’ll need at least a 10% down payment

Investment property loan requirements

Conventional financing is your only option if you want to buy an investment property. To get an investment property loan, you’ll need:

• A down payment of at least 20%
• Proof of rental income
• An appraisal that analyzes the market rents for the home
• A credit score of at least 640
• Cash reserves of two to six months’ worth of mortgage payments

Multifamily home loan requirements

Buying a two- to four-unit investment property can be a quick way to earn multiple streams of rental income from a single property. However, you’ll need to spend more money upfront.

To buy a multifamily investment property, you’ll usually need:

• A 25% down payment
• A minimum credit score of 640 for a two-unit home
• A minimum credit score of 660 for a three- to four-unit home
• A DTI ratio of 36% or less
• Six months’ worth of cash reserves

House hacking with an FHA multifamily loan

If you don’t mind being a homeowner and landlord at the same time, you may want to consider buying a two- to four-unit home with an FHA loan. As long as you live in one of the units, you can buy the property with as little as 3.5% down and use the rental income on the other units to qualify. The only drawback: You’ll need to have six months’ of cash reserves to qualify for a multiunit FHA purchase.

Key mortgage documents

If you plan to apply for a home loan in 2023, having the right documents upfront may lead to a smoother mortgage experience. Here’s a list of the most common items you’ll need:

• Pay stubs for the last 30 days
• W-2s for the last two years
• Bank statements for the last 60 days
• Federal tax returns for the last two years
• Proof of homeowners insurance
• 1099 forms (if you’re self-employed or commissioned)
• Documented dividends, stock earnings and other sources of income
• Proof of bonus income
• Pension statements
• Securities documents, such as stocks, bonds and life insurance policies
• Social Security or disability income award letters, if applicable
• Specific forms required by FHA, VA or USDA-approved lenders
• Gift letter (if any portion of your down payment is coming from a donor gift)
• A fully signed purchase agreement

Other mortgage requirements changes worth knowing in 2023

Lower rates now available for HomeReady and Home Possible loans. To offset rising rates in 2022, Fannie Mae and Freddie Mac eliminated many of the pricing markups, allowing lenders to offer lower rates to consumers trying to buy a home using the HomeReady or Home Possible mortgage programs.

You’ll pay a higher rate for a second home. Buying that vacation home will cost you more every month after Fannie and Freddie added significant markups to the pricing lenders can offer on second home mortgages.

Tips for qualifying for a mortgage

If you’re thinking about buying a home in 2023, here’s a brief recap of which programs may be the best fit for your finances:

Qualifying for a conventional loan is a good fit if:

• You have high credit scores
• You can make at least a 20% down payment
• You’re eligible for the HomeReady or Home Possible loan programs and can make a 3% down payment

Qualifying for an FHA loan makes sense if:

• You have credit scores between 500 and 619
• You have at least a 3.5% down payment and a 580 credit score
• You want to buy a two- to four-unit home with a 3.5% down payment

Qualifying for a VA loan may be the best choice if:

• You’re an eligible military borrower
• You don’t want to make a down payment
• You want to avoid mortgage insurance

Qualifying for a USDA loan is the best option if:

• You have a low to moderate income
• You’re buying in a USDA-designated rural neighborhood
• You don’t have the money for a down payment