How mortgages are approved
Get a clearer view of the mortgage approval process by learning some of the factors lenders consider while reviewing your application
When you apply for a mortgage, your loan officer forwards your application and supporting documentation to an underwriter. The underwriter reviews your loan scenario—which refers to your financial circumstances and the type of loan you’re seeking. The underwriter also checks your supporting documentation, such as your W-2s and federal tax returns, to make sure you meet loan program guidelines and determines whether you qualify for the loan.
“Most lenders want your debt-to-income ratio to be 36% or less.”
The underwriter may consider:
- Your ability to repay the loan. Is your monthly income enough to cover the new mortgage payment, in addition to all your other expenses? To figure this out, lenders use your debt-to-income ratio (DTI). Most lenders want your debt-to-income ratio to be 36 percent or less, but be sure that percentage reflects what you can comfortably afford.
- Your likelihood to repay the loan. Your payment history and credit score indicate to lenders your likelihood to make future payments.
- The home value. The underwriter carefully looks at the home’s value to make sure it meets or exceeds the purchase price. This assessment is based on a professional appraisal ordered by your lender. The home’s value also helps the underwriter calculate your loan-to-value ratio (LTV) and ensure it fits within the loan program’s guidelines. To qualify for a conventional loan, most lenders look for a loan-to-value ratio of no more than 80–95 percent.
- Your available funds.
- If you’re purchasing a home, the underwriter verifies your down payment funds. If you have a down payment of less than 20 percent, typically you are required to pay private mortgage insurance (PMI), which increases your monthly payment.
- The underwriter reviews your documents to see whether you have enough money to cover closing costs.
- You may also be required to set aside a reserve of two or more monthly mortgage payments. Lenders typically require reserves to cover your mortgage payment in case of emergency or unforeseen events, but details depend on the loan program and/or loan amount.
Now that you know what goes into approving a mortgage, you can monitor your income, debt, credit and savings to ensure you’re in good shape when you apply. Remember, the home’s value and your loan program’s guidelines also play a role in whether your loan application is approved.