Mortgage Qualification: Unraveling the Mystery

The home loan application process isn't something most people go through very often. For many, that makes it a bit intimidating. However, while mortgage qualification might sound like a complicated process, the basics are actually very easy to understand.

How to Qualify for a Mortgage

Lenders consider a number of factors to determine whether a borrower is qualified for a home mortgage.

These factors include:

  • Assets
  • Credit score
  • Debt-to-income ratio
  • Documentation


Assets include checking and savings accounts, investment accounts, retirement plans and other sources of funds borrowers can use to make a down payment and pay closing costs.

Some lenders and some types of loans also require reserve funds, which are additional sums of money the borrower has on hand in case of an income shortfall, emergency or unexpected home repairs. Reserves are measured in months -- if the prospective monthly house payment is $1,000, and the applicants will have $2,500 after closing, they are said to have 2.5 months of reserves.

Substantial sums aren't required to purchase a home, but buyers do need to show they have enough funds available.

Buyers who are short of cash can finance some of their costs, obtain a gift from a family member, friend or employer, or get a grant from a down payment assistance fund. A gift must be a true gift with no expectation of repayment to be considered an acceptable asset to buy a home.

Credit Score

The credit score is the result of a complicated mathematical algorithm that measures the statistical probability of mortgage default. The data that most heavily influences the score is credit history -- whether a borrower uses credit responsibly and has a good track record of paying his or her debts on time.

Examples of debts that may be tracked by a credit history include mortgages, credit cards, charge cards, vehicle loans and some student loans.

An applicant who uses a variety of different types of credit regularly, but not up to the limit, and makes timely payments should have a higher credit score than one who uses little or no credit or frequently makes payments late or not at all.

With the latest credit scoring systems, certain medical bills may be granted some leniency in credit scoring.

Debt-to-income Ratio

A borrower's debt-to-income, or DTI, is an important element of mortgage qualification, because it helps the lender assess whether the borrower can afford a mortgage.

Rather than look at the borrower's total income or total debt in isolation, lenders use DTI, which is a ratio, to compare a borrower's monthly income to his or her monthly debt payments (credit cards, auto loans, etc.). The DTI is calculated by taking the total amount of payments due each month (excluding living expenses like food and utilities) and dividing it by the gross (before tax) monthly income. For example, someone who earns $5,000 a month and spends $2,500 a month for rent, car loans and credit card payments has a DTI of 50 percent ($2,500 / $5,000 = .5).

Most lender guidelines allow DTIs up to 45 percent, although some do go higher and others are more restrictive. Lenders' use of DTI means moderate-income borrowers whose debt level is modest and manageable can be just as well-qualified for a home mortgage as higher income borrowers who have a larger amount of debt. The best-qualified borrowers have a comfortable income and little or no debt relative to how much they earn.


Borrowers must provide copies of documents that support the information they give the lender as part of the mortgage qualification process.

Documents that may be required include:

  • Bank statements
  • Investment account statements
  • Paycheck stubs
  • IRS Form W-2s
  • Income tax returns
  • Profit and loss statement if self-employed
  • Gift letter
  • Canceled rent checks

With this information in mind, it can be a very straightforward process to apply for a loan and receive loan approval from a lender. Just remember: assets, credit score, DTI and documentation

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