Qualifying (and Staying Approved) for a Mortgage

Lenders consider three main factors when determining your qualification for a mortgage. They are: 1) your FICO (credit) score and credit report, 2) debt to income ratio, and 3) your assets. Once you receive conditional mortgage approval, you should not do anything that would change these factors before you close on your home.

Your FICO Score and Credit Report

When you apply for a mortgage, your ability to pay can largely be reduced to a single number, your FICO (credit) score. The three major credit reporting agencies – Equifax, Experian and TransUnion – use a slightly different system to arrive at a score. However, the primary factors they all consider are:

• Credit History: How long have you had credit?
• Payment History: Do you pay your bills on time?
• Credit Card Balances: How much do you owe on how many accounts?
• Credit Inquiries: How many times have you had your credit checked?

Each of these, and other items, are assigned a value and a weight. The results are added up and distilled into a single number. Credit scores range from 300 to 800, with higher being better. Typical home buyers have scores between 600 and 800.

After you receive conditional approval from your lender, do not do anything that would alter your credit report/score, such as make a major financed purchase (for example, a car or furniture) or open a new credit card (like Lowe’s or Home Depot).

Click here for more information about your FICO score, credit report, and what you can and cannot do about them.

Debt-to-Income Ratio

The importance of debt and income is their relationship to each other. Your debt-to-income ratio is your gross monthly income divided by the amount you spend on debt.

The general rule of thumb is that 28% of your income should be used for your mortgage payment, including taxes and insurance, and 36% for the mortgage payment plus the rest of your debt. Anything you do to negatively affect your debt-to-income ratio may change an "approval" to a "disqualification".

Assets

The balances of your liquid assets also are considered during the qualification process. These assets can include checking accounts, savings accounts, certificates of deposit, money market accounts, retirement accounts, and mutual funds. To avoid any red flags before closing on your home, you should not:

• Significantly change the balance on a liquid asset account
• Close accounts
• Change banks

If a red flag is triggered by one of these actions, you may be asked to produce a paper trail explaining any changes.