Which Two Mortgage Types Are the Easiest to Get Approved for?

Since 2010, the government has imposed massive regulations on banks to avoid a repeat of the housing crisis. The Consumer Finance Protection Bureau developed the rules, which were mandated by the Dodd-Frank Act, to prohibit many of the loose practices prevalent during the housing bubble, such as NINJA loans.

As a result, mortgage lenders’ requirements have become very stringent, making it more difficult for buyers to qualify. Borrowers could previously be approved with lower credit scores and down payments. Most lenders now require a credit score of at least 700 and a 20% down payment.

In 2024, approximately one in five mortgage applicants were denied, reflecting a significantly higher rejection rate compared with previous years. LendingTree found an average nationwide mortgage denial rate of 11.27%.

According to Bankrate, 48% of applicants for any type of credit — including mortgages — faced a rejection on at least one application in the year leading up to December 2023.  

Common reasons for denial in 2024 were:

• High Debt-to-Income (DTI) ratio: This was the most common reason for denial, accounting for approximately 40% of all rejected applications, according to the National Association of REALTORS^®.
• Insufficient cash reserves: In addition to high DTI, borrowers were often denied for not having enough money for a down payment, a factor that has worsened as housing affordability declined.
• Credit history: Negative credit history and low credit scores also remained a significant obstacle for many applicants.
• Elevated interest rates: Continuing high interest rates made homes more expensive and increased monthly payments, pushing more applicants past lenders’ qualification thresholds. 

According to the Consumer Financial Protection Bureau (CFPB), higher interest rates have severely damaged housing affordability, especially impacting lower-income and minority borrowers.

CFPB reports that mortgage interest rates have risen over five percentage points since bottoming out in January 2021 at 2.65%, peaking at 7.79% in October 2023. Since then, rates have eased to around 6.2% in September 2024.

And Now, The Good News

What many borrowers don’t know is that they have options. You do not have to deal with the strict guidelines of conventional lenders or the big banks to get a mortgage.

There are alternative ways, and they’ve been out there a long time. The easiest mortgage to qualify for depends on your wants and needs.

There are FHA loans, known for allowing lower minimum credit scores, and Fannie Mae HomeReady^® loans, which are great for those struggling to come up with a down payment.  

Option 1: Fannie Mae HomeReady^®

Fannie Mae’s HomeReady^® mortgage program provides low-income home loans to prospective homebuyers with a small down payment. The guidelines are more flexible to make it easier for borrowers to qualify, and monthly insurance can be lower than with Conventional loans. Buyers may also use gifts or grants to cover their down payment and closing costs.

Both first-time homebuyers and repeat buyers are eligible. If all borrowers on the loan are first-time buyers, at least one must complete the homeownership education requirement.

Eligibility requirements:

• Minimum 620 credit score
• Minimum 3% down payment
• Maximum 80% of the area median income (AMI)

Option 2: FHA loans

For buyers with a credit score under 620.

FHA loans funded by approved lenders are insured by the Federal Housing Administration (FHA). Because of their lenient requirements, FHA loans can be a good option for homebuyers who cannot meet the 620 credit threshold required by Conventional loans or who are unable to afford the loan’s closing costs.

With a credit score as low as 500, you may be able to qualify for an FHA loan, but you will be required to make a larger down payment. Regardless of credit score or down payment amount, all borrowers must pay both upfront and annual mortgage insurance premiums. FHA borrowers who put down the required 3.5% pay FHA mortgage insurance for the life of the loan.

Eligibility requirements:

• 500 to 579 credit score and minimum 10% down payment
• 580 credit score and minimum 3.5% down payment
• Meeting your county’s FHA loan limits

Let us help you get into your dream home

From offer to financing to closing, Embrace Home Loans offers a complete range of lending solutions and programs that can help you get into the home of your dreams.

When you need us, we’ll be ready with a wide array of programs just right for you and your specific needs. Contact us today and see why so many homebuyers choose Embrace.

FAQs

Why is it harder to qualify for a mortgage today?

Since the 2008 housing crisis, lenders have tightened their requirements under the Dodd-Frank Act and the Consumer Financial Protection Bureau’s guidelines. Most conventional lenders now require higher credit scores and larger down payments to reduce lending risk.

What credit score do I need to qualify for a Conventional mortgage?

Most lenders now look for a credit score of at least 700 for Conventional loans. Borrowers with lower scores may face higher interest rates or need to explore alternative loan options.

What are some common reasons mortgage applications get denied?

The top reasons include low credit scores, high debt-to-income ratios, and not having enough saved for a down payment. Rising interest rates have also made it harder for some borrowers to qualify.

What is a Fannie Mae HomeReady^® loan?

The Fannie Mae HomeReady^® program helps low-income borrowers qualify for a mortgage with as little as 3% down and a minimum credit score of 620. Buyers can also use gift funds or grants toward their down payment and closing costs.

Who is eligible for a HomeReady^® loan?

To qualify, borrowers must have an income below 80% of their area’s median income, meet credit and down payment requirements, and — if first-time buyers — complete a homeownership education course.

What is an FHA loan and who should consider it?

An FHA loan is insured by the Federal Housing Administration and is ideal for borrowers with lower credit scores or limited funds for a down payment. With scores as low as 500, you may still qualify by putting more money down.

How much do I need for a down payment on an FHA loan?

Borrowers with a credit score of 580 or higher can qualify with a 3.5% down payment. Those with scores between 500 and 579 must make at least a 10% down payment.

Does Embrace Home Loans offer both FHA and HomeReady^® loans?

Yes. Embrace Home Loans offers a wide range of mortgage programs, including FHA and Fannie Mae HomeReady^®loans, to help borrowers with varying credit and income levels achieve homeownership.