Key Factors Lenders Consider in a Mortgage Application

6 June 2025

Buying a home is one of the biggest financial decisions most people will ever make. And unless you're paying in cash, you'll need a mortgage to make it happen. But here’s the thing—getting approved isn’t as simple as just asking for the money.

Lenders scrutinize every aspect of your financial life before giving the green light. They want to make sure you can pay them back on time, without struggling. So, what exactly do they look for? Let’s break it down into the key factors that can make or break your mortgage application.

1. Your Credit Score – The Gatekeeper of Mortgage Approval

Think of your credit score like your financial report card. It tells lenders how responsible you are with debt. The higher your score, the better your chances of getting approved—and at a good interest rate.

Most lenders prefer borrowers with a credit score of at least 620, but if you want the best rates, aim for 740 or higher. If your score is on the lower side, don’t panic! You can still qualify, but you may need to make a bigger down payment or accept a higher interest rate.

What impacts your credit score?
- Payment history – Do you pay your bills on time?
- Credit utilization – Are your credit card balances low, or are you maxing them out?
- Length of credit history – The longer, the better.
- Types of credit – A mix of credit cards, loans, and other accounts is ideal.
- Recent credit inquiries – Too many applications in a short time can be a red flag to lenders.

If your score is less than ideal, improving it before applying for a mortgage can save you thousands of dollars over the life of your loan.

2. Income and Employment Stability – Can You Afford the Loan?

Lenders need to be confident that you can afford your mortgage payments, and your income plays a big role in this. It’s not just about how much you make, though—it’s also about how stable your income is.

They’ll typically ask for the following:
- Pay stubs (usually from the past two to three months)
- Tax returns (from the last two years)
- W-2s or 1099s (for employees or self-employed individuals)
- Bank statements

If you’re self-employed, you may need to provide additional documentation, such as profit and loss statements. Job hopping? Lenders typically prefer applicants with at least two years of consistent employment in the same field.

3. Debt-to-Income Ratio (DTI) – Keeping Your Debt in Check

Your debt-to-income ratio (DTI) is a critical factor in determining how much home you can afford. This ratio helps lenders see if you’re already drowning in debt or if you have enough breathing room for a mortgage payment.

To calculate DTI, lenders add up your monthly debt payments (like car loans, student loans, credit card payments) and divide that by your gross monthly income.

There are two types of DTI:
- Front-end DTI – This only includes housing-related expenses (mortgage, taxes, insurance).
- Back-end DTI – This includes all your monthly debt obligations.

Most lenders prefer a back-end DTI of 43% or lower, though some loans may allow up to 50%. If your DTI is too high, paying down some debt before applying for a mortgage can improve your chances.

4. Down Payment – The More, The Better

A big down payment shows lenders that you’re financially responsible and have skin in the game. The more you put down, the lower the risk for the lender.

- Conventional Loans – Typically require at least 3% - 5% down.
- FHA Loans – Require a minimum of 3.5% down if your credit score is at least 580.
- VA & USDA Loans – Allow 0% down for eligible borrowers.

If you can afford it, a 20% down payment can save you from paying private mortgage insurance (PMI)—which can add hundreds to your monthly mortgage payment.

5. Property Type and Its Impact on Loan Approval

Not all properties are treated equally in the eyes of a lender. The type of home you’re buying affects how much risk they’re taking on.

- Primary residences – Lenders love these because you're more likely to keep up with payments.
- Second homes & vacation properties – Require bigger down payments and come with stricter lending requirements.
- Investment properties – Higher interest rates, larger down payments, and stricter DTI requirements apply.

If you’re buying a fixer-upper, some loan programs (like FHA 203(k) loans) allow for renovations, but lenders will still want to know if the home is livable.

6. Savings & Reserves – A Backup Plan Matters

Lenders don’t just look at your income—they also want to see if you have enough savings to cover expenses in case of an emergency.

They often check if you have reserve funds that could cover three to six months’ worth of mortgage payments. This is especially important if you’re self-employed or have an unpredictable income stream.

7. Loan Type and Terms – Choosing the Right Fit

Different loan options come with different rules. Your choice of mortgage type can influence your approval odds.

Here are the most common types:
- Conventional Loans – Best for borrowers with solid credit and stable income.
- FHA Loans – Ideal for first-time buyers with a lower credit score.
- VA Loans – Only for military service members and veterans with no down payment needed.
- USDA Loans – For homebuyers in rural areas, often with no down payment required.

Lenders also consider the loan term (15, 20, or 30 years) and whether it’s a fixed-rate or adjustable-rate mortgage.

8. Past Financial History – Bankruptcy, Foreclosures & Late Payments

Your financial past can come back to haunt you in a mortgage application. Lenders will check if you’ve had any:
- Bankruptcies – You usually need to wait 2-4 years after discharge before getting a mortgage.
- Foreclosures – A waiting period of about three to seven years applies, depending on the loan type.
- Late Payments – A few late payments might not ruin your chances, but a history of them can raise red flags.

If you’ve faced financial troubles, showing improved financial habits can help regain lender confidence over time.

9. Appraisal & Home Value – Ensuring The Home is Worth It

Even if you get pre-approved, the lender still needs an appraisal to make sure the home is worth what you’re paying for it.

If the appraisal comes in lower than the purchase price, the lender may not approve the full loan amount. In that case, you’ll either have to:
- Renegotiate the price with the seller
- Pay the difference out of pocket
- Walk away from the deal

Final Thoughts

Getting approved for a mortgage isn’t just about making money—it’s about showing lenders that you’re responsible with it. Your credit score, debt levels, income, and financial history all play a big role.

If you’re thinking about buying a home, start preparing early. Pay off debts, save for a down payment, and make sure your finances are in top shape. That way, when the time comes, you’ll be in the best possible position to lock in a mortgage with favorable terms.

Ready to take the plunge? A little preparation now can save you thousands in the long run!