Buying your dream home often starts with being approved for a loan but what exactly goes into qualifying for a mortgage? In this post, we’ll cover the basics of what lenders look for when deciding to approve or deny a buyer’s mortgage application.

Your credit score

Understanding how your credit score works is the first step towards getting the loan you need. Your credit score (also called a FICO score) represents a summary of your entire credit history in one number. The higher the number, the better your score. Credit scores are calculated from your credit report, which includes data such as your bill payment history and an analysis of how your outstanding debts compare to your current income.

Debt to income ratios

Even if you have fantastic credit, a lender still may deny your mortgage application if the loan amount is determined to be more than you can afford. It’s a good idea to use a mortgage calculator or speak with an experienced mortgage broker to figure out how big of a mortgage you can realistically qualify for.

Affordability of a given loan is determined by looking at two debt to income ratios:

• The front-end debt to income ratio uses a formula to multiply your monthly income by a percentage to determine how much you can comfortably pay each month on housing. The industry standard is about 28% but different lenders use different numbers. Housing costs include the loan payment, taxes and insurance.
• The back-end debt to income ratio compares all your current outstanding debt to your monthly income, including car loans, credit card balances and other debts. If your debt obligations exceed your lender’s expectations for your income, you may not qualify for the loan

Proof of income and employment history

Applicants with a stable income and solid employment history are viewed by lenders as a safer bet to repay their mortgage. Applicants who are self-employed, do contract work or have other non-traditional or inconsistent income streams may encounter more difficulties qualifying for a mortgage, even if their income level exceeds the amount that would normally lead to an approval of the loan.

Buyers with unique income or employment situations often benefit from working with a mortgage broker instead of a brick-and-mortar bank. A mortgage broker can help less traditional buyers find a lender that is more flexible with proof of income requirements.

Collateral and appraisal

One of the final steps is comparing the appraised value of the home you’d like to buy against the amount of money you need to borrow. If the home is worth less than the total of your loan, your lender may not approve your mortgage. In some cases, buyers are given the opportunity to pay the difference if the appraisal comes in lower than expected.

Find out what you qualify for

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