What a Lender Looks for in Your Mortgage Application

Applying for a mortgage loan is an information-intensive process. You provide the lender with an abundance of information, which the lender then uses to determine whether or not to approve the loan. Understanding what information a lender uses to make a decision on your loan application can demystify the process and even help you identify strengths and areas for improvement in your own financial profile.

Can you repay?
When evaluating a mortgage application, the lender’s primary goal is to make sure you will repay the loan. The lender will gather documentation from you, order an appraisal, and communicate with the underwriter to help your loan get approved, while also advising you about the best loans available to meet your needs.

Lenders must comply with federal lending rules, including new rules issued earlier this year by the Consumer Financial Protection Bureau which aim to ensure that borrowers can afford their monthly payments and repay the loan. The new rules are intended to lower the risk of borrowers defaulting and going into foreclosure.

Mortgage-lending criteria
To comply with the new rules and minimize their own financial risks, lenders will consider these criteria to determine whether or not to approve a borrower’s application for a mortgage loan:

• Debt-to-income ratio (DTI) — This is calculated by taking the total monthly mortgage payment (including principal and interest, taxes, and insurance) plus other long-term monthly debt payments (such as car loans, credit card debt, and installment loans) and dividing the total by your gross monthly income (income before taxes). To comply with the federal Qualified Mortgage Standards, the DTI should be no more than 43%. Lenders will look at your DTI and financial information to determine whether you have the ability to repay the loan. A too-high DTI may mean you’re trying to buy more home than you qualify for and may cause your loan application to be turned down.
• Creditworthiness — This is determined by your credit score and overall financial picture. Several factors affect credit score: the ratio of your credit card balances to available credit; your payment history; the age of your credit history; and any liens, judgments, and loan payoffs on your record. Lenders use your credit score to determine your general willingness to pay off your debts.

The three major credit repositories are Experian, TransUnion, and Equifax. Credit scores of 720 and higher often fetch the best interest rates.

• Loan-to-value ratio (LTV) — The LTV is the loan amount expressed as a percentage of the home’s value.

• Income stability — This is determined by factors such as how long you’ve been with the same employer and whether you’ve been earning a stable income in the same line of work.

• Liquid assets — These include your bank account balances and any other assets you have, such as investment and retirement accounts. Depending on your qualifications, you may not need to have liquid assets.

Lenders use these factors to determine whether a borrower has the income and assets from which to repay the loan for which they are applying. In effect, a lender wants to review your application to determine your ability to pay off your loan. After all, the lender is taking a chance on you and needs to minimize its own risk. It is important that all borrowers do their own analysis as well, so that they determine what comfortably fits within their budget.