Have you ever wondered how a mortgage lender decides to approve or reject an applicant? Luckily, the factors mortgage lenders use to determine if and how much you can qualify for are clear-cut, and are similar across the country.
You can use our mortgage affordability calculator below to find out how much you can afford, and read on to find out the information lenders consider in the mortgage approval process.
Getting pre-approved for a mortgage is the best course of action. You’ll know how much money you can afford to borrow before you start your house hunt.
Here are the factors mortgage lenders use to find out if you qualify for your mortgage:
Mortgage lenders will first verify that you will be able to afford your mortgage payments going forward. You can be employed or self-employed, but will need proof of income, like pay stubs or a letter from your employer. Your lender will also want to know how long you’ve been with your current employer, to ensure there’s stability in your employment.
Your credit score plays a significant role when applying for a mortgage. It gives lenders an idea of your financial stability, and how responsible you’ve been with money in the past.
If you’ve had credit problems in your past, it can be better to resolve those first before jumping into a mortgage. That way, if you improve your credit in a year or two, you’ll be able to get a better mortgage rate. Alternatively, you can apply for a mortgage with bad credit but expect to pay a higher rate. If you take a take a mortgage from a lender that specializes in lending to lower credit scores (like HomeTrust or Equitable Bank), consider opting for a shorter term; once your credit is fixed, you can apply for a lower rate when you renew.
Your credit score allows you to access better rates. 680 and above will help you qualify for a mortgage with an “A” lender—a financial institution with the best rates. 600–680 will have lenders and brokers asking more questions about your financial situation to determine who you should work with. Below 600 means you'll have to pay higher rates, working with “B” lenders like HomeTrust or Equitable Bank.
You may have an excellent credit score, but if you already have a lot of debt—student or car loans, for example—lenders may be skeptical that you can also manage mortgage payments, property taxes, and home expenses. Lenders want to be assured that you won’t ever miss a payment and default on your mortgage, so you’ll need to have enough income to cover your outstanding credit, either by increasing your income or paying down your debt.
Your assets will be compared to your liabilities. If you have valuable assets—other property or vehicles, for example—that’s a very good thing. They can help balance out your outstanding credit and are available to sell off, should you find it difficult to make your monthly mortgage payments.
Lenders will also look at the size of the mortgage you’re applying for and compare that to several factors.
Your debt service ratio compares your income to your fixed expenses—things like property taxes, car payments, and loan expenses—to ensure you have enough each month to meet your mortgage payment.
Once your lender has determined your maximum affordability, you must ensure you have the minimum down payment.
To learn more about down payments and debt service ratios, read our page on mortgage affordability.
The specific documents you’ll need will vary by lender but here are the most common ones you’ll be asked for. It’s good to have them available, so you’re as prepared as possible: