What Do Mortgage Lenders Look For?

Have you found your ideal home? It's time to figure out your payment and financing plan.

Obtaining a loan from a mortgage lender is the most common way to pay for property. Whether you’re familiar with the mortgage lending process or not, you likely have questions about mortgage loans and how to qualify for them.

Top 6 Factors Mortgage Lenders Look For In A Borrower

When applying for a mortgage loan as a home buyer, many factors are taken into consideration to determine the loan terms you’ll qualify for. By familiarizing yourself with these factors, you can better prepare for the mortgage approval process. Let’s take a look at the elements evaluated by mortgage lenders and define what each of them means so you’ll fly through the approval process.

1. Credit History

One of the most commonly known factors lenders look at in a mortgage loan application is credit history. Lenders will review your credit report to ensure you have a healthy credit score. A credit score is a three-digit number based on the data in your credit report. It gives lenders a reasonable idea of how likely you are to repay their borrowed money.

Mortgage lenders will thoroughly review your credit reports and history from the three major credit bureaus: Experian^TM, TransUnion^Ⓡ and Equifax^Ⓡ. This helps lenders better determine if you qualify as a loan candidate.

Your credit history includes past debts, payment history and financial behavior that gives lenders a window into how you manage your finances and current debts. Bankruptcies, foreclosures, delinquent accounts and outstanding debts are potential red flags for mortgage lenders.

It’s important to maintain good credit if you want to qualify for a mortgage loan with a low interest rate. You can maintain and improve your credit score by:

• Paying your bills on time
• Keeping your credit card balances low
• Managing your debts
• Limiting applications for new credit
• Keeping old cards open
• Staying updated on your credit report

2. Income

With a large purchase like a piece of property, it’s important to show lenders that you have enough income to make your mortgage payments on time.

Mortgage lenders will review your paystubs, W-2s, tax returns or award letters for your monthly income to determine if you can make these payments. If you’re a self-employed home buyer, lenders will look at your business income and may request additional information about your income to make their decision.

3. Employment History

To verify your income stability, mortgage lenders will look through your employment history. If you have any employment gaps or other signs of poor work history, your loan is more likely to have a higher interest rate.

The general rule is that mortgage lenders ask for 2 years of employment history. Income from self-employment may still be considered for individuals with less than a 2-year history, provided their most recent tax returns show a full year of self-employment income from the current business.

Additionally, documentation demonstrating prior income at a similar or higher level must be included in the loan file. If you're currently self-employed, mortgage lenders will require additional documentation to ensure you qualify for a loan.

Expect your lender to ask for documents that prove:

• Financial strength
• Income stability
• Details of your self-employment
• Ability to generate income in the future

4. Assets

Mortgage lenders will see you as a more secure loan candidate if they know you have assets that can be converted into cash quickly in the event of a financial setback. Also known as liquid assets, these holdings differ from physical or nonphysical assets as they can easily be traded for cash.

These assets include:

• Stocks
• Bonds
• Certificates of deposit (CDs)
• Shares

For example, lenders will often look at bank statements to verify a borrower has cash reserves they could access if they were to lose their job.

5. Existing Debt

Similarly to credit history, mortgage lenders will also look to see if you have any existing debt. For example, lenders will look for credit card debt, car loans or student debt to determine if payments for these loans would affect a borrower making their mortgage payments.

In addition, lenders will also evaluate a borrower’s debt-to-income ratio (DTI). DTI measures the percentage of a borrower’s income that goes toward monthly debt payments.

6. Down Payment Percentage

The amount of your down payment can determine both your eligibility for a mortgage loan and the interest rate offered. Generally, if a borrower offers a larger down payment on the loan, a lender will tend to offer a more favorable interest rate. Paying less may require you to buy private mortgage insurance (PMI) and continue to make payments until you reach 20% equity in your home.

What Mortgage Companies Look For: FAQs

Let's take a look at some of the most frequently asked questions regarding what lenders look for when borrowers apply for mortgage loans.

What fees should I expect to pay with a mortgage?

There's a lot more to a mortgage loan than your down payment. Your closing disclosure will include a list of all the closing costs you must pay. While fees can vary with each mortgage lender, some of the most common ones include the following:

• Application fees
• Appraisal fee
• Attorney fee
• Origination fee
• Credit report fee
• Home inspection fees

What is the ideal debt-to-income ratio a mortgage lender looks for?

Your debt-to-income ratio tells you how much of your income is required for your debt payments and mortgage payments. To increase your chances of gaining approval, your debt-to-income ratio shouldn't be higher than 50%.

How can I boost my credit score before applying for a mortgage?

To improve your credit score before seeking a mortgage, consider paying off debt to lower credit utilization, make all payments on time and avoid opening new credit accounts. It’s also recommended to check your credit report for errors and dispute any inaccuracies.

The Bottom Line

Knowing how lenders determine your mortgage eligibility can help you prepare properly before submitting an application. Remember to keep these things in mind when searching for a home to purchase and continue to be financially responsible to increase your chance of qualifying for better loan terms.

Begin the approval process today with Rocket Mortgage^®.