In the heyday of the housing boom in 2004 and 2005, lenders used to joke that "all you need to get a mortgage is to be breathing." Times have changed. Between the real estate market debacle and the banking crisis, standards for loan approval have tightened far beyond breathing. (For related reading, take a look at 4 Key Factors That Drive The Real Estate Market.)

TUTORIAL: Economic Indicators To Know

While it may be harder to qualify for a mortgage today, the process in many ways is simply a return to the pre-housing boom days when consumers were required to prove their income and assets, demonstrate their ability to repay the loan and have sufficient savings for a down payment and cash reserves.

Down Payment Requirements
The days of widely available, no-down-payment loans are gone for most buyers. In the midst of the housing boom, no-down-payment loans were readily available, but these days conventional loans require a down payment of 5 to 15%. Government-insured FHA loans require a down payment of 3.5% for qualified buyers, but those with a credit score below 580 must make a down payment of 10%. VA loans, available to members of the military and veterans, are available without a down payment. The USDA loan program, available to residents in designated rural areas, also offers no down payment loans. (Learn more about VA loans in The Unique Advantages of VA Mortgages.)

Loan Types
Borrowers used to be able to apply for a variety of mortgage products such as interest-only loans and option-ARMs. While interest-only loans are rarely available today, the option-ARMs have disappeared completely. Plain vanilla fixed-rate loans are the most popular for the majority of borrowers today, followed by hybrid ARMs with a fixed-rate of one-to-ten years, followed by a rate that adjusts yearly. (Read more about option-ARMs in Option ARMs: American Dream or Mortgage Nightmare?)

Credit Scores
Lenders today rely more heavily than in the past on your credit score to determine not only whether you qualify for a mortgage but also to set your interest rate. While lenders vary, most say a credit score of 680 is required to be approved for a conventional loan. FHA loan requirements are a little looser, and some lenders (but not all) will approve an FHA loan for a consumer with a credit score of 620 or under. Many require a score of 640 for an FHA loan. Borrowers with a credit score of 720 or 740 and above are likely to be approved, depending on other financial circumstances. Interest rates are set on a tiered basis, with the best interest rates going to borrowers with the highest credit scores.

At the height of the housing boom, many lenders were approving "no-income verification/no-documentation loans," but those are pretty much impossible to find today. Borrowers need to prove their income with two years of tax returns and will need bank statements to prove that they have assets and cash reserves. Money that is being used for a down payment and closing costs must have a paper trail that shows where it came from, since there are rules concerning the ability to use gift funds.

A few years ago, lenders were approving "stated income" loans, but now lenders take the time to verify employment and are looking carefully at job stability as part of the approval process. Mortgage approvals are much more difficult for self-employed applicants who must prove a steady stream of income and the viability of the business.

Another more restrictive move for borrowers today is the debt-to-income ratio. In the days of looser guidelines, lenders were more willing to stretch debt-to-income ratios to as much as 50% if the borrowers seemed to have the ability to repay the loan. Most lenders now limit borrowers to a housing payment of 31 to 33% of gross monthly income and an overall debt of 43 to 45%. Sometimes a high credit score or significant cash reserves or a high down payment will allow borrowers to exceed these guidelines, but lenders are much less willing to expand these ratios than in the past.

Extra Credit Checks
As part of their new stricter guidelines, lenders sometimes recheck your credit after a loan approval but before the loan settlement date as an added protection for their investment. Borrowers need to be very careful to avoid using their credit cards, applying for additional credit or switching jobs during the crucial period between a loan approval and the settlement.

The Bottom Line
All of these new rules and changes to the mortgage process mean that one more thing has changed since the banking crisis: Loan approvals take longer. Lenders now have to carefully check every detail on the loan application along with having an appraisal done, so borrowers need to be prepared for an application-to-settlement period of at least 30 days, but often 45 to even 60 days. While this may be frustrating, it is all part of a renewed effort among lenders to carefully screen loan applicants. (For additional reading, also check out Can You Hit A Perfect Credit Score?)

Related Articles
  1. Credit & Loans

    How to Recover From Identity Theft

    Identity theft isn't going away, and fixing it can take time and money. But doing nothing isn't an option. Rather than become a victim, it is time to take action.
  2. Home & Auto

    How to Help Your Teen Buy Their First Car

    Help your teen secure a safe car and a low-interest loan through planning, research and co-signing.
  3. Retirement

    Using Your 401(k) to Pay Off a Mortgage: The Pros and Cons

    Learn the advantages and drawbacks of using assets accumulated within a 401(k) retirement savings plan to pay down a mortgage balance.
  4. Retirement

    Should Retirees Still Have Mortgages?

    Identify the pros and cons of keeping a mortgage into retirement, and understand in which situations it is beneficial not to pay off a mortgage.
  5. Economics

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  6. Credit & Loans

    10 Ways Student Debt Can Destroy Your Life

    If you're getting a student loan, think critically about how you will manage your loan. Student debt could have a profound negative impact on your life.
  7. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  8. Credit & Loans

    Explaining Equated Monthly Installments

    An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
  9. Investing Basics

    Tiny House Movement: Making Market Opportunities

    The tiny house movement throws all assumptions about household budgeting and mortgage management out the window, and creates new market segments too.
  10. Investing

    Where Should I Keep My Down Payment Savings?

    While saving up for a down payment, where should you keep your money. A bank? The stock market? It all depends on your timeline.
  1. Will my credit score suffer from debt consolidation or refinancing?

    You have several options for reducing your debt burden. You can enroll in a professional debt management plan, or consider ... Read Full Answer >>
  2. Can I file for bankruptcy more than once?

    Filing bankruptcy is never a simple decision, but sometimes it is the best thing you can do in your current financial situation. ... Read Full Answer >>
  3. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  4. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  5. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  6. What types of liens are seen as good and which are bad for my credit?

    Creditors that allow purchases to be made through financing often require property to be pledged against a credit account; ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!