What Do Lenders Look At When Applying for a Mortgage Loan?

What Do Lenders Look At When Applying for a Mortgage Loan?

You’ve decided to buy a home, and this is a very exciting time in your life. You’ve gathered your documents, and you’re ready to apply for a mortgage loan.  As you fill in the application, you might also wonder what exactly does the credit union look at to decide if you are approved for the loan?

How does a lender determine if you qualify?

Lenders take a risk on loaning anyone such a large loan as a mortgage loan, so lenders do look at a lot of different information to decide if you qualify and are likely going to pay back that loan.  Four key things lenders look at are:

  1. Credit history
  2. Capacity
  3. Capital
  4. Character

mortgage loans and refinancing - Covington LA, Slidell LACredit History

Anytime you apply for a loan, the lender will pull your credit report with credit score.  Your credit score has lots of information on it, but it has 2 major points (3 for a government backed loan program) that mortgage lenders will typically look at to determine if you are likely going to pay back the loan.

Payment History:

Lenders will review if you’ve missed payments and if so, how often.  If there is a pattern of overdue debts, the lender may question your ability to make mortgage payments every month.

Age of Credit History:

Opening new credit accounts shortly before applying for a home loan could potentially jeopardize the age of your credit and a lender may question why you need more credit.

Number of accounts open:

Many government backed programs require you have a certain amount of credit accounts established.

Capacity – Just what is “capacity?”

Lenders look at a borrower’s capacity, which is a borrower’s financial ability to pay back a loan.  Two aspects of capacity are debt-to-income ratio and income stability.

Debt-to-Income Ratio:

The lender will compare your debts to your total gross income.  The lower this ratio, the lender may be more assured of a mortgage payment fitting into your monthly bills.

In other words, after you pay all of your other bills, how much do you have left. This is called disposable income levels.

Income Stability:

Financial institutions will often verify two years of employment history.  This helps the lender to have confidence in the stability of your income. If you are a professional freelancer or if you own your own business, you will be asked for more information such as tax returns to help prove enough income to pay on the loan monthly.

A mortgage lender will also look at how you get paid.  Regular paychecks are more reliable income than income that depends on bonuses or commissions, but all income is weighed carefully on an individual basis.

Capital and Assets

Having some available capital helps to make you a more appealing borrower to a banking institution.   Mortgage lenders will look to see if you have some money available in checking and savings accounts because this money can be used to pay mortgage payments if necessary.

Saving up over a period of time will show a history of accumulating these assets and a level of financial responsibility.


The obligation that a borrower feels about paying a loan reflects the borrower’s character.  There is no accurate way to measure trustworthiness, so a lender often has to make a subjective decision on a borrower’s trustworthiness.

Looking at your payment history, job history, and other factors is just one part of measuring character.  When you work with First Castle, we try to get to know you personally, we actually communicate with you to ensure we understand your lending needs.

Often, pre-qualifying for a mortgage helps to build a relationship with a lender.

We Can Help You Get into the Home of Your Dreams

When lenders review your mortgage application, they use these numbers and measurements to decide if you are a reliable risk for lending a large sum of money.  If you are interested in a mortgage loan or if you need to improve your credit score, please give us a call – (985) 867-8867.

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