3 Things Mortgage Lenders Look at Beyond Your Credit Score

by Christy Bieber | Published on Oct. 28, 2021

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It's not just your credit that matters.

When you apply for a home mortgage loan, lenders want to be sure you'll repay what you owe. They review the details of your financial situation in order to assess that likelihood.

Your credit score is obviously one of the most important factors that lenders look at. Your score provides a quick and easy way to assess how you have handled your debt in the past.

But most mortgage loan providers look beyond your credit to consider other key financial details as well. Here are three big things that can have a major impact on your chances of loan approval.

1. Your debt-to-income ratio

Lenders want to know you aren't too deeply in debt and over-committing yourself to payments you probably won't be able to afford. One of the ways they assess this is looking at your debt relative to your income.

Lenders actually calculate your debt-to-income ratio in two ways. The first, the "front-end ratio," compares housing costs to income. Housing costs include your mortgage principal and interest, property taxes, and insurance. Typically, lenders like this ratio to be below 28%.

They also look at the back-end ratio, which includes the total amount of other debt payments you have. They look at your monthly mortgage payment, the cost of property taxes and insurance, and all other monthly payments (including credit cards, auto loans, personal loans, and any other obligations). The total amount of debt is then compared to your monthly income. This ratio should ideally be below 36%.

If you have too much debt relative to your income, you'll have fewer lenders to choose from and may need to borrow through a government-backed loan (such as an FHA or VA loan) with relaxed requirements. Or you could be denied a loan entirely.

When you find that a high debt-to-income ratio interferes with your ability to borrow, you'll need to reduce your debt payments by paying off loans or by buying a house with lower costs.

2. Your employment history

Having stable income is crucial to paying off your loan on time. Lenders look at your employment history to assess the likelihood that you'll lose your paycheck.

Mortgage lenders like to see proof that you've been at your job for a while and have earned a consistent income. If you've switched careers or your wages have fluctuated a lot, you may not get credit for what you've earned recently when lenders calculate your debt-to-income ratio.

To make sure a spotty employment history doesn't keep you from purchasing a home, do your best to avoid changing jobs or taking a pay cut within two years of the time you apply for a home loan.

3. Whether you've recently taken on debt

If you've recently taken on new debt, this can present a red flag to lenders, who may fear you're on a borrowing spree. If you can, avoid new loans within a year or so of the time that you apply for a home loan.

By not taking on recent debt, keeping a stable employment history, and keeping your total debt payments at a reasonable percentage of your income, you can maximize your chances of approval for a mortgage loan.

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