The 5 factors affecting your mortgage approval

Mortgages come from banks, credit unions, financial institutions, or private lenders. In general, you typically have to meet a certain level of expectations prior to getting approved for a mortgage no matter how high. Lucky for you, at Pine, we’ve put together a list of things that will determine your likelihood of getting a mortgage approval.

1. The ‘C’ word‍

When you apply for a mortgage, the first thing your lender will do is check your credit score. Your credit score is determined by your past borrowing history and payment behaviours. The higher your score, the more likely you are to be approved for a mortgage, and the lower your interest rate will be. Your credit score doesn’t need to be a scary or mysterious thing, you can check and keep track of it through most online bank accounts. 

Though there isn’t necessarily a rate you need to hit before being approved, a typical mortgage lender is looking for score of at least 620. Ideally, having a credit score above 750 is the best place to get a decent mortgage but that doesn’t mean it’s impossible otherwise. Buying a home with a low credit score means that you’ll end up paying more for your mortgage throughout the time you have your loan.This is one of many reasons why it’s important to try to raise your credit score as much as possible prior to looking for a mortgage by paying down debt, making your payments on time, and avoiding applying for new credit in the time leading up to getting your loan. It’s all about the long game.

2. Your debt-to-income ratio

Your overall debt-to-income (DTI) ratio is the amount of debt you have relative to income - including your future mortgage payments. This is calculated by how much you pay a month divided by how much you make. If the combined total of your housing expenses, car loan, and other loan payments is $2,000 monthly and you earn $6,000 each month, then your debt-to-income ratio is calculated as $2,000 divided by $6,000, resulting in 30%.

Typically to qualify for a mortgage, your DTI ratio should be capped around maximum 44%. Though this is subject to be adjusted depending on your lender, it’s important to ensure that you are not living beyond your means no matter the mortgage you receive. 

3. Work history

Fifth Harmony isn’t the only one asking where you’re working from: all lenders, no matter the type, require you to provide proof of employment. Typically lenders want to see that you have a steady income and have had one for at least two years previous to purchasing your home. This allows the lender to trust in your abilities to pay off your mortgage through the length of your loan. For the self-employed, the mortgage process can be more complex. Lenders will ask for business and income records spanning several years to ensure your long-term profitability and ability to handle mortgage payments. If you're self-employed and seeking mortgage approval, consulting a licensed mortgage broker is wise.

4. Your down payment

If you’ve been thinking about purchasing your first home for a while, chances are you’ve thought about what your down payment will look like. Generally, lenders want you to put down 5 to 25% of the price of your home. This is so that you have some home equity as you make your monthly payments. The amount you put down upfront on your house also determines how much interest will be calculated based on your mortgage. 

For optimal house purchasing, it’s typically recommended that you put down at least 20% of your house's selling value. If you make a down payment of less than 20% on a house with a standard mortgage, you'll be required to purchase mortgage default insurance. This might also somewhat restrict your mortgage approval choices.

5. The value and condition of the home

Something that isn’t commonly thought about from the beginning is the value and condition of the home you’re looking to purchase. A home inspection is done as well as having your home appraised. This is done to ensure that the lender isn’t giving you money for a house that isn’t safe to live in, is in good condition, and is worth the amount of money you will spend on it over the years. 

In some instances, a home inspection can come back to reveal significant problems invisible to the naked eye. Ideally, you want to build this into your negotiation with the sellers (current homeowners) to get repairs done before the house closes. Otherwise, you may watch the Property Brothers for DIY inspiration. 

With home appraisals, the lender has the option to determine how much they will allow you to borrow. This can be a benefit for you because if the house is appraised at a lower than the asking price, you then have the opportunity to negotiate the price down or walk away from the transaction. 

At the end of the day, most of these should be top of mind when you’re thinking about purchasing your forever home. Selecting a home is a significant decision and one that should be taken very seriously by both the lender and the potential owner. Your lender wants to set you up for success when it comes down to paying for your home, and so do you. Follow these steps closely to ensure that you are fully prepared when It comes down to closing the door on your new home!