What factors can affect your ability to get a mortgage?

A couple stands inside the entrance to a house with their baby. A realtor is talking to them while holding her computer.
March 08, 2023 | Lois Sullivan

One key step in purchasing a home is qualifying for a mortgage, or the loan used to buy property. Although the application process can be overwhelming, it's a lot easier if you know what to expect.

If you've ever applied for a loan in the past, you know that certain aspects of your financial history play into your ability to qualify and the rate and term for which you can qualify. A mortgage loan is similar, with certain elements playing a major role in the approval process. Explore what factors can affect getting a mortgage and how to prepare your finances before submitting an application.

Credit score

One of the first things a lender will look at is your credit score, which reflects your history of repaying your debts. Various financial factors are included in your credit score, such as student and automotive loans, credit cards and lines of credit. Some credit histories also include cell phone bills and rental property agreements. Lenders view applicants with higher credit scores as lower-risk individuals, so they're able to qualify for loans more easily.

In addition to using the credit score for qualification purposes, a lender also uses the score to determine the rate class for which an individual can qualify. For example, lenders might have top-tier classifications for those with good to excellent credit, and those borrowers can get substantially lower interest rates. Among most lenders, the benchmark credit score to get into a higher tier is 650.

Before you submit an application, reviewing your credit score and taking a closer look at your history is helpful. If you spot any discrepancies, you can work with the major credit reporting bureaus to remove errors or inaccuracies and bump up your score. A low credit score makes it more difficult to qualify for a loan, so it's worth trying to raise it before applying for a mortgage.

Down payment

A down payment is a sum of money paid to the seller at the time of the purchase. The buyer pays the sum, and the amount they can pay plays a role in the overall approval process and the total monthly payment. To put it simply, a higher down payment results in a lower amount borrowed from the lender. The down payment also determines what type of loan a borrower can qualify for, as some loan types require a minimum percentage to be paid down. 

A conventional mortgage often has a requirement of 20%, although a buyer who can't pay that much down may be able to get the loan by paying mortgage insurance. Private mortgage insurance (PMI) shields the lender against the risk of the borrower defaulting. Some specialty loan types, such as FHA, USDA and VA loans have lower down payment requirements.

Employment history

Your employment history plays a major role in whether or not you can qualify for a mortgage loan. Lenders use this as a measure of risk since a steady source of income indicates the applicant's ability to pay back the loan. In contrast, an individual with a spotty employment history who changes jobs frequently often doesn't look as stable to a lender. Lenders typically have to verify employment as part of the review and approval process and look at several months' worth of pay stubs.

Self-employed individuals can qualify for mortgage loans, although the process may be a bit more complex. Those who work for themselves typically have to provide tax documents for at least the last few years, allowing the lender to determine their average income. If you're thinking about changing jobs, it's best to wait to do so until you've closed on your loan.

Debt-to-income ratio

Before a lender approves a mortgage loan, they assess the applicant's debt-to-income ratio. This involves an assessment of how much money you bring in each month and any outstanding debts you're responsible for at the time. This calculation may include various types of debt, such as:

  • Auto loans
  • Credit card debt
  • Student loans
  • Lines of credit
  • Medical or health care debt
  • Mortgage loans

By dividing your total debt by your gross monthly income, a lender can determine your debt-to-income ratio. This formula provides insights into the monthly mortgage payment you would be able to realistically afford on top of your existing debt.

Although lenders will look at this ratio early in the application process to determine whether a borrower can qualify for a mortgage, they can also review it again at any point before the loan closes. It's important to avoid making large purchases on a credit card, opening a new credit card or taking on additional debt when you're applying for a mortgage loan. These factors can change your debt-to-income ratio and affect your ability to qualify.

Loan amount

The prices of the homes you're looking at factor into your ability to qualify for a mortgage. It's smart to start the application process before you shop for homes, as you can get a better idea of what you can qualify for before falling in love with a property you can't afford. The amount you need to borrow is the cost of the home, minus your down payment, plus any closing costs associated with the mortgage loan process.

Home location

The state and even the city you're shopping in can affect your interest rates and qualification status. Rural areas may qualify for different loan types, while homes in urban areas could have different requirements.

Loan term

The term of a mortgage loan refers to the length of time allotted to repay the total debt. The most common mortgage term is 30 years, although some lenders offer shorter terms for those who want to pay off the debt sooner. When assessing mortgage lenders and loan options, it's important to compare similar options. The term you select will determine how long you'll make monthly payments, the interest rate you can qualify for, and how much you'll pay each month.   

You might also hear lenders talk about fixed-rate and adjustable-rate loans. These terms refer to whether the interest rate will remain the same for the duration of the loan or if it can change. A variable rate might offer a lower rate at first, but it comes with a higher level of risk since the interest rate could increase based on economic conditions and market rates. Although you can't change the interest rate on a fixed-rate loan, you can refinance and get a new loan if rates drop.

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