An adjustable-rate mortgage (ARM) has an interest rate that changes periodically. The benefit of an ARM is that it’s typically initially cheaper than a fixed-rate mortgage, keeping your monthly payments more affordable at the outset. The drawback, however, is that the rate can go up and down, sometimes substantially, after the initial rate period ends.

What is an adjustable-rate mortgage?

ARMs have variable interest rates that change at predetermined times, such as every six months, based on the movement of a market index. Many mortgage lenders rely on the Secured Overnight Financing Rate (SOFR) to determine the adjustments.

One of the most common types of ARMs is a hybrid ARM, which comes with a fixed, usually lower rate for three, five, seven or 10 years. After that fixed period, the rate can move higher or lower. The rate can’t rise indefinitely, however. There are caps on how much the rate can go up in each interval and also over the life of the loan.

ARM loan requirements 2022

ARMs have very similar borrower requirements to fixed-rate mortgages, although qualifying for one can be more difficult if your income isn’t high enough to weather an upward rate adjustment. Here are the basics:

  • ARM credit score: If you’re interested in a conventional ARM, you’ll need a credit score of at least 620 to qualify. 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: Generally, the DTI ratio for an ARM can’t exceed 50 percent. Borrowers are qualified for ARMs based on ability to cover a higher monthly payment, not the initial lower payment, so if you have many other debt payments and a lower income, you might not qualify.
  • ARM down payment: A conventional ARM requires at least 5 percent of the home’s purchase price for a 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 2022, you can get a conforming ARM for up to $647,200 (or as much as $970,800 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. These can be had in much higher amounts, such as $2 million or more, but they also require a higher credit score and down payment to qualify.

As with any other mortgage, you’ll also need to be able to furnish proof of employment and income. This includes pay stubs, tax returns, W-2s and paperwork about any other sources of income, such as child support.

What about ARM disclosures?

Aside from the criteria you as the borrower need to meet, ARM lenders are also required to provide you with disclosures before you close the loan, and subsequently in advance of rate changes. This documentation helps you understand how your ARM is structured, whether you can convert it to a fixed-rate loan in the future and how adjustments will affect your monthly payment.

Bottom line

The requirements to qualify for an adjustable-rate mortgage (ARM) versus a fixed-rate loan aren’t all that different, but there are some nuances. For example, a conventional ARM requires a minimum of 5 percent down, compared to just 3 percent for a comparable fixed-rate mortgage. You might also need a higher income to establish that you can, in fact, afford the monthly payments if the rate on your ARM were to adjust up. Whichever type of mortgage you apply for, be prepared to provide evidence of employment, income and savings.