What Factors Do Mortgage Lenders Consider?

1. Your Credit History

Mortgage lenders scrutinize your credit report well beyond your credit score to gain a sense of your track record with financial obligations.

What lenders look for:

• A good credit score: Mortgage lenders often require a FICO^® Score^☉ of at least 620, which is considered fair, but you'll have better chances with a score of 670 or higher. Lower credit scores may be accepted for government-backed loans.
• Strong payment history: Lenders review payment history on credit cards, loans, lines of credit and anything else on your credit report. They want to see a track record of responsible, on-time payments and could ask for explanations for missed or late payments.
• Low credit utilization: Your credit utilization ratio indicates how much of your available revolving credit you're using at a given time, primarily on credit cards. Using a large amount can make you appear overleveraged and risky. Utilization rates over 30% can be a warning sign to lenders, and can also do extra damage to your credit scores, so avoid exceeding this.
• Minimal new inquiries: Lenders check if you've recently applied for other forms of credit or debt, which put hard inquiries on your report; too many in a short time could reveal possible financial trouble.
• No red flags: Lenders prefer credit reports without negative marks that show risk, such as bankruptcy, charge-offs, delinquencies, collections or accounts settled for less than the amount owed. They'll also probably check for dispute statements or pending disputes on your credit report, since they may delay your application.

How to improve your credit:

• Get your credit mortgage-ready by making all debt payments on time; set up automatic payments so you don't forget.
• Catch up on any past-due accounts.
• Improve your credit utilization ratio by reducing credit card balances and avoiding new debt.
• Avoid applying for or opening new credit card accounts or loans in the six to 12 months leading up to your mortgage application.
• Don't close old credit card accounts that are in good standing, since the length of your credit history is a factor in your credit score.

Learn more >> How to Build Credit to Buy a House

2. Your Income and Savings

The consistency and amount of your income and assets are important factors to mortgage lenders, since they can reveal your ability to afford the loan and weather financial ups and downs.

What lenders look for:

• Steady income: Mortgage lenders prefer borrowers with stable, predictable income. While they consider income from any type of work, additional income—such as that from investments—may also be included in their assessment.
• Verifiable information: When reviewing your income and employment, mortgage lenders want to verify the information for accuracy. They'll usually need to view your tax returns and pay stubs and may even directly contact employers.
• Savings documentation: While not as critical as credit or income, lenders also usually want to see your bank statements. Your application can also list assets such as cash (things like checking accounts, savings accounts and certificates of deposit) and investments (retirement accounts, stocks or bonds).
• Adequate assets: Lenders view borrowers as less risky when they have assets, especially high-value ones, since it can indicate an ability to make a larger down payment or afford mortgage payments even if an emergency arises.

How to boost your income and savings:

• Avoid switching jobs for several months prior to applying for a mortgage, if possible. Lenders may be wary if you take on a new job right when you're shopping for a home, especially if your income is appreciably higher than it used to be or if you're looking for a large home loan.
• Get a second job or side hustle. Just remember that lenders want formal documentation, so make sure you can verify it with a W-2 form, tax return and/or pay stub. You might be required to have this higher level of income for two years to demonstrate consistency.
• Leading up to your mortgage application, budget and cut back on nonessential spending to build up your savings.

Learn more >> Ways to Save Money

3. Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) shows lenders how much of your income goes to your debts each month and how you're doing financially overall. Lenders get this ratio by dividing the total amount of your monthly debt payments by your total monthly pretax income.

For mortgage purposes, lenders might consider payments for the following as debts:

• Auto loans
• Personal loans or lines of credit
• Home equity loans or lines of credit
• Student loans
• Credit card minimum payments
• Alimony
• Child support

What lenders look for: Lenders usually require a DTI under 43%, though some place the limit at 36%, and the lower your DTI is, the better chances you have of mortgage approval. If your DTI exceeds 36%, you might face a higher interest rate or be denied altogether.

How to improve your DTI ratio:

• Avoid taking on new debt obligations as you near your mortgage application.
• Work on paying down debt balances, especially credit cards, to lower your debt-to-income ratio.
• Boost your earnings. Use some of the strategies mentioned above to increase your income, which can help balance out debts or provide you extra income to pay off debt faster.

Learn more >> How to Reduce DTI Before Applying for a Loan

4. Your Down Payment

A down payment is the amount of money you pay upfront, decreasing how much you need to borrow in a mortgage. Your down payment will depend on how much you have saved, the price of the home you're purchasing and even the type of home loan you're applying for.

What lenders look for: The rule of thumb is to aim for at least a 20% down payment on a home. A down payment of this size looks less risky to lenders and gets you closer to the best loan interest rates, though some conventional loans have much lower down payment requirements.

If you get a conventional loan and put down less than 20%, you'll likely get a higher interest rate and pay private mortgage insurance (PMI) to offset lender risk. This could be worth it if saving up 20% isn't doable.

Depending on your situation, you may be eligible for a government-backed mortgage with minimal down payment requirements. For example, a U.S. Department of Veterans Affairs (VA) loan requires nothing down, and loans through the Federal Housing Administration (FHA) permit as little as 3.5% down. With FHA loans, you usually have to pay mortgage insurance for the life of the loan.

How to save for a down payment:

• Create a budget that cuts or reduces other costs, then divert that money to a savings account (ideally a dedicated one to avoid spending it elsewhere). High-yield savings accounts pay higher interest than traditional savings accounts, helping your down payment fund grow more quickly.
• Set up recurring automatic transfers from your checking account to your down payment savings account so you can't forget to save.
• Dedicate windfalls—think tax refunds, work bonuses and birthday money—to your down payment savings to reach your goal faster.
• Explore payment assistance programs, which offer financial help in the form of low-cost loans, tax credits or grants that aren't repaid. Qualifications vary by state and can be strict, with eligibility often limited to first-time homebuyers or low-income borrowers.

Learn more >> How to Save for a House

5. Your Loan Type

Mortgages and homes are not all the same, and depending on the type you want or can qualify for, lenders will have different criteria. Also, lenders want proof you can afford the closing costs for the type of loan you apply for, so prepare to supply this documentation.

What lenders look for:

• For conventional mortgages, lenders prefer FICO^® Scores above 620, and ideally above 670. If yours is lower, lenders may prefer that you apply for a loan with more lenient borrowing standards. For example, FHA loans allow credit scores as low as 500 if you put 10% down, and 580 if you put 3.5% down.
• With a fixed-rate conventional loan, choosing a shorter term like 15 years has lower interest rates but stricter borrower requirements due to much larger payments. Longer terms like 30 years have higher interest rates but more affordable payments and possibly a little less lender scrutiny on your finances.
• Adjustable-rate mortgages can be riskier for borrowers due to interest rate fluctuations, but they may be a bit easier to qualify for. Just be sure to carefully consider the pros and cons before taking out this type of loan.
• It's easiest to qualify for a mortgage to buy a primary residence, and some government-backed loans require it. Borrowing criteria for second homes and investment properties is stricter due to the increased risk of multiple mortgages.

How to determine the best loan type: It's smart to do your own research, but if you're unsure of the ideal mortgage type or what you can likely qualify for, meet with a mortgage loan officer at a local bank branch or call your prospective lender to get help narrowing it down. A savvy real estate agent may also have helpful advice.

Learn more >> What Type of Mortgage Loan Is Best?

The Bottom Line

As you learn about the factors that can keep you from getting a mortgage, it becomes easier to take action to improve your finances.

Since your credit report is one of the most crucial things mortgage lenders review in the underwriting process, check your free credit report and credit score from Experian to see how it looks and where there's room for improvement.