Key takeaways
- Adjustable-rate mortgage (ARM) loan requirements vary by the type of loan you get — whether conventional or government-backed — as well as the lender.
- You'll need to meet credit score, debt-to-income ratio and down payment requirements to qualify for an ARM home loan.
- An ARM could be worth it if you plan to live in your new home for only five to 10 years, moving before the fixed-rate intro period ends.
An adjustable-rate mortgage (ARM) is a home loan whose interest rate changes periodically after a set intro period. In contrast, a fixed-rate mortgage has an interest rate that stays the same over the loan’s term. After the fixed intro period, ARMs’ interest rates change either every six months or each year, depending on the loan specifics.
Here’s what you need to know about ARM loan requirements if you’re considering getting this type of mortgage in 2024. Many mortgage lenders rely on the Secured Overnight Financing Rate (SOFR) to determine the adjustments for ARMs. The yield on the one-year Treasury bill and the 11th District cost of funds index (COFI) are other common benchmarks.
ARM loan requirements of 2024
ARM requirements are similar to those for fixed-rate mortgages. However, qualifying for an adjustable-rate mortgage can be more difficult because you’ll need enough income in case interest rates climb. As with any other mortgage, you’ll need to prove your employment and income as part of the application. That means providing paperwork such as pay stubs, tax returns, W-2s and any documents about other income, like child support.
ARM credit score qualifications
You’ll need a credit score of at least 620 to qualify for a conventional ARM. FHA ARMs have a lower threshold: 580. VA ARMs don’t have a blanket credit score requirement, but many VA lenders look for at least 620.
ARM debt-to-income (DTI) ratio qualifications
Generally, the DTI ratio for ARM mortgage loans can’t exceed 50 percent. Borrowers qualify for ARMs based on their ability to cover a higher monthly payment, not the initial lower payment. Lenders want to be sure you have enough income to make your payment if the interest rate goes up. So, if you have many other monthly obligations and a lower income, you might not qualify.
ARM down payment requirements
A conventional ARM requires at least a 5 percent down payment. An FHA ARM requires at least 3.5 percent. There’s no down-payment requirement for a VA ARM.
ARM loan limits
In 2024, you can get a conforming ARM for up to $766,550 (or as much as $1,149,825 if you live in a more expensive housing market). If you need a bigger mortgage than that, some lenders offer jumbo or nonconforming loans with adjustable rates. You can get these loans in much higher amounts, but they also require a higher credit score and down payment to qualify.
Should you get an adjustable-rate mortgage (ARM)?
An ARM can be a great idea considering the initial lower interest rates, but it’s not the best fit for all homeowners. Here are scenarios when an ARM mortgage loan might make sense.
- You’re prepared for potential rate increases: You need to be comfortable with the risk that your mortgage payments could go up after the initial fixed-rate period is over.
- You will save money: It’s important to calculate how much you could save during the initial period of an ARM to see if it’s worth it. For those taking out a jumbo loan, for example, an ARM can be the smart choice, since even a fraction of a percent of savings can add up to a significant amount.
- You plan on living in your home for just five to 10 years: An ARM often makes the most sense if you only plan on living in the home you’re buying for around five to 10 years — before the loan’s interest rate resets. That way, you don’t necessarily have to worry about your payments going up for that particular mortgage.
- You expect rates to drop in the future: You’re betting that interest rates will trend down, so that even when your ARM starts fluctuating, your payments won’t increase (and could even shrink). Or, you could refinance to a lower-fixed rate mortgage.
Learn more: Should you get an adjustable-rate mortgage?
Frequently asked questions on ARM loans
ARMs work by offering a lower, fixed interest rate for an introductory period. After that period is over, the rate changes once or twice per year for the remainder of the loan. The variable rate depends on a specific market index that the lender uses as a benchmark for its ARMs, moving up and down with that index. Adjustable-rate mortgages are capped at how much they can adjust each time, and over the loan’s lifetime.
The largest benefit of an ARM is that it offers a lower fixed interest rate during its introductory period (typically between five and 10 years). If you think you’ll move before that period ends, you can take advantage of the lower intro rate and avoid the downside of your rate potentially adjusting up. If you don’t move and keep the ARM, you’ll be able to benefit from interest rate declines — unlike a fixed-rate mortgage-holder.
Along with the benefits of an ARM, there are some drawbacks to consider. First of all, many require a higher down payment than their fixed-rate counterparts, and can be harder to qualify for. But more significantly, the rate associated with your loan may increase, which will cause your monthly mortgage payments to go up. While there may be a cap on the rate increases associated with your mortgage, the increased payments can still cut into your budget and be challenging to deal with.
Additional reporting by Mia Taylor
