Here’s what you need to know about the stricter lending standards triggered by COVID-19.

QUALIFYING FOR A mortgage in 2021 may be a different process from years past. The coronavirus pandemic has prompted many lenders to change home loan requirements and altered the evaluation process for borrowers.

“In April, as the economic impact and job losses of COVID-19 took hold, many mortgage lenders chose to tighten their credit standards as a way of mitigating the increased risk of default and late payment,” says Dara Blume Clewley, director of financial risk and economics at online mortgage lender Better.com.

As the year progressed, these standards prevented buyers with lower credit scores from taking advantage of dropping interest rates. “Now, as expectations for an economic recovery in 2021 build, lenders are more comfortable, and we’re seeing early signs that they can relax their standards,” Blume Clewley says.

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While the effects of COVID-19 will continue to ripple through the economy, “The good news is that the pandemic encouraged the housing industry to reimagine the lending process,” says Joseph Watts, senior vice president of residential lending at North American Savings Bank.

Lenders have instituted practices to accommodate customers in the short term, such as drive-by appraisals, and in the long term, such as greater flexibility in determining whether borrowers can repay their loans, he says. This flexibility could extend to self-employed borrowers, who have to work even harder to prove their income since the pandemic struck.

“To qualify for a conventional loan, you need a pay stub or W-2, but if you’re a gig or self-employed worker, that presents a challenge,” Watts says.

The bank statement loan has emerged as a solution to allow a qualified self-employed individual to apply for a mortgage with bank statements instead of tax returns or pay stubs.

Whether you will pursue this type of loan or choose an alternative, here are the minimum requirements to qualify for a purchase or refinance mortgage.

How to Qualify for a Mortgage

The requirements to qualify for a home loan vary based on the type of mortgage you want. Below are the minimum qualifications for the most common types of mortgages, keeping in mind that other conditions can be attached to underwriting approval.

Conventional Mortgage Qualification Requirements

Down payment: Most conventional mortgages require a 5% down payment, although some borrowers may qualify for as low as 3% down. If you make less than a 20% down payment, you will need mortgage insurance, which protects the lender if you default. Once you have 20% equity in your home, you should be able to remove the mortgage insurance.

Credit score and DTI: Conventional conforming mortgages – loans not backed by government agencies that also meet criteria for purchase by Fannie Mae and Freddie Mac – generally require a credit score of at least 620. Some lenders may require a better score if other factors raise your credit risk, such as a high debt-to-income, or DTI, ratio.

Most lenders look for a DTI ratio of 45% or less, although Fannie Mae allows for DTIs of up to 50% on loans underwritten using its automated Desktop Underwriter system. Manually underwritten loans must have a DTI below 36%.

Loan-to-value ratio: Loan-to-value, or LTV ratios, for single-family primary homes cannot exceed 97% for fixed-rate loans, 95% for adjustable-rate mortgages or 80% for cash-out refinances.

Employment and other requirements: Lenders look for steady employment supported by pay stubs covering the last 30 days, two months of recent bank statements and W-2s for the last two years. If you’re self-employed, you will need to provide two years’ worth of your personal and business tax returns, your most recent earnings statement, and business bank statements for the last three months.

Federal Housing Administration Loan Qualification Requirements

Credit score and down payment: You must have a credit score of at least 500 to qualify for an FHA loan. Your credit score determines the size of the down payment you must make. FICO scores of 580 or higher require only a 3.5% down payment, compared with a 10% down payment for borrowers with FICO scores between 500 and 579.

LTV: The maximum LTV ratio for FHA loans is 96.5% for borrowers with credit scores of at least 580. If your credit score is between 500 and 579, the maximum LTV ratio is 90%.

Mortgage insurance and other requirements: FHA borrowers have to pay two types of mortgage insurance premiums: an upfront premium when you get the loan and an annual premium. You’ll need to provide proof of employment, supported by the same documents required for conventional loans, plus have a steady source of income and a DTI below 43%. An FHA loan also requires the home you purchase to be used as your primary residence.

Department of Veterans Affairs Mortgage Qualification Requirements

Certificate of eligibility: You’ll need a certificate of eligibility, or COE, which shows lenders that your service history and duty status qualifies you for a VA home loan. You can apply for a COE through the VA’s website or by mail.

Credit score and DTI: The VA does not set a minimum credit score to qualify for a loan but asks lenders to review your profile. Although the VA prescribes no maximum DTI, lenders will turn up the scrutiny on applicants with ratios greater than 41%.

Down payment and VA funding fee: A VA loan generally doesn’t require a down payment as long as you don’t have any outstanding VA loans and the sale price of the home isn’t more than the appraised value. But you may need to pay a one-time VA funding fee if you want to borrow.

This fee is based on the type of loan and calculated as a percentage of the total loan amount. Other factors, such as down payment amount and whether you’re using a VA home loan for the first time, may also affect your VA funding fee.

Employment and other requirements: Lenders will ask for many of the same employment documents required for conventional loans, including pay stubs, bank statements and W-2s, or tax returns and earnings statements for self-employed individuals.

Bank Statement Loan Qualification Requirements

Employment qualifications: Borrowers need to have been self-employed for at least two years. You will need to provide bank statements from the same account for the last 12 consecutive months as proof of income. You’ll need to set up an escrow account to cover taxes and insurance premiums.

Credit score: Lenders such as North American Savings Bank also require a credit score of 680 or higher and a DTI of 45%.

What Are 2021 Mortgage Loan Limits?

Mortgage loan limits have increased in 2021, thanks in part to climbing home prices.

Conforming conventional loan limits, set by the Federal Housing Finance Agency, jumped to $548,250 in 2021 for one-unit properties in most jurisdictions, from $510,400 in 2020. The ceiling for one-unit properties in most high-cost areas is $822,375.

FHA loan limits have also increased in 2021, rising to $356,362 in most areas and $822,375 in high-cost regions.

With VA home loans, limits do not apply on loans of more than $144,000 as of 2020 if borrowers have full entitlement. You have full entitlement if you’ve never used your VA home loan benefit, you’ve paid off another VA loan and sold the property, or you’ve used your benefit but had a foreclosure or short sale and repaid the VA. Instead of a limit, the VA will guarantee up to 25% of the loan amount.

For veterans without full entitlement, the VA loan limit for 2021 in most cities is $548,250 and can be as high as $822,375.

If you’re self-employed and shopping for bank statement loans instead, you will need to borrow at least $200,000 but no more than $1 million.

How Has the Economy Affected Mortgage Lending?

The economic climate has changed the way lenders screen borrowers.

Lenders are now considering changes in the applicant’s income and the reason for a refinance, says Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan.

“Lenders are paying attention to if you are refinancing due to financial hardship and are looking at if you are doing a cash-out refinance or simply a general refinance, as well as the reasoning for the refinancing,” he says. “The reason for the refinance may require the borrower to supply additional information, making the process a little longer.”

Longer application processing times may be the new norm for both purchase and refinance loans in 2021.

“The process will take longer because lenders are becoming more picky about who they lend to,” says Chuck Czajka, founder of Macro Money Concepts in Stuart, Florida. “They are asking far more questions and requiring more documentation, some even going back a few more months for earnings.”

Borrowers can expect the mortgage process to take a few extra weeks compared with previous years, he says.

Not only lenders but also borrowers should ask plenty of questions about qualifying for a home loan, Blume Clewley says. Two crucial questions to ask are about a lender’s points and credits policy and mortgage discount eligibility.

Points and credits allow you some flexibility with the terms of your mortgage, she says. Paying points allows you to obtain a lower APR for more cash upfront, while using credits means you put less money down but take a higher APR, Blume Clewley says.

Asking about discounts can’t hurt, either. They’re not only for first-time homebuyers but also repeat buyers and refinancers.

“Many lenders just don’t have the tools or incentive to check your eligibility for these programs and pass the savings on to you,” Blume Clewley says.

Overall, borrowers can expect that the lending landscape won’t radically change in 2021, says Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

“We are optimistic that, on the back of a COVID-19 vaccine and additional fiscal stimulus from the U.S. government, the broad economy will see growth in the new year,” he says. “Mortgage rates, however, tend to be a lagging indicator, so they will only rise when there is significant national economic recovery.”