The 3 Most Important Numbers Mortgage Lenders Look At

by Christy Bieber | Updated July 19, 2021 - First published on June 13, 2021

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These numbers could make or break your mortgage loan approval.

When you apply for a mortgage loan, lenders want to make sure that you are a good credit risk. That means they like to know that you will pay back your loan on time without any problems during the repayment period.

There are a number of things lenders look at when they try to decide whether you're going to be a responsible borrower or not. But three key numbers are especially important, and they can make or break your loan application:

  • Credit score
  • Front-end debt-to-income (DTI) ratio
  • Back-end DTI ratio

Here's why they matter.

1. Credit score

Your credit score is a three-digit number that sheds light on your entire borrowing history.

There are actually several different scores, including a FICO Score and VantageScore. But all credit scoring formulas use the same basic approach. They take into account:

  • How much of your available credit you've used
  • Your payment history
  • Whether creditors have ever had to take legal action against you
  • The types of borrowing you've done
  • How much new credit you've applied for recently

After considering all of these criteria, you're assigned a score by one of the three major credit bureaus. This score typically ranges between 300 and 850. Scores below 660 (approximately) are considered to be poor or fair, while scores above 740 are considered to be very good or exceptional.

By looking at your credit score, lenders get quick insight into how you've dealt with debt in the past and how you're dealing with it now. While it's possible to qualify for some types of mortgage loans with low credit, it can be more difficult, and you'll have fewer choices of lenders.

2. Front-end DTI ratio

Lenders also look at another important number when deciding whether you can afford the mortgage you want: your debt-to-income ratio (DTI).

Your debt-to-income ratio measures your debt relative to your income, but there are actually two different DTI ratios that matter.

Your front-end ratio is the first. It refers to the amount of your gross monthly income that will go towards housing costs if you qualify for the new mortgage. Housing costs include your mortgage payment, as well as taxes and homeowners insurance.

For example, if your gross income is $5,000 and you want to buy a home that would come with total monthly costs of $1,800, then your front-end DTI would equal $1,800 divided by $5,000 or .36. That's a 36% front-end DTI ratio.

In this case, you might have a hard time finding a mortgage lender, because most prefer your front-end ratio to be below 28%.

3. Back-end DTI ratio

Your back-end ratio is also a method of assessing the amount of financial obligations you'd have relative to your income if you were approved for a mortgage. But this doesn't just take housing costs into account -- all of your other debts are also factored in.

To add to the above example, if you had monthly payments of $1,800 for a house, $200 for a car loan, and $25 for a credit card, then your back-end DTI would equal the total of all those monthly payments divided by your gross income of $5,000.

Since $2,025 divided by $5,000 is .405, your back-end ratio would be 40.5%. Most lenders want your back-end ratio to be below 36%. So again you might face challenges borrowing.

Of course, "most" isn't all, and there are some lenders that allow you to borrow with a higher debt-to-income ratio as well as with a low credit score. But you need to consider both the loan terms and whether your decision really makes sense before you move forward.

Committing too much of your income to housing costs could put you in a financial bind, especially if you're in a lot of debt already. So, if your DTIs are above these recommended thresholds, you may want to wait to buy a home until you've paid down some of what you owe. Likewise, if your credit score isn't where you'd like it to be, then waiting a while to try to increase it could potentially pay off in the form of a lower rate and cheaper borrowing costs.

If you’re considering buying a home, it's important to understand what these numbers are and why they matter so much. That way, you can better judge the likelihood of getting approved for a loan before you decide whether you're ready to buy a house.

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