Lenders check whether you can and will repay: your credit, your income and debts, your savings and the value of the home.
The big four
Every lender asks the same basic question: can you repay this loan, and will you? Federal rules require most home lenders to make a good-faith check of your ability to repay. To answer it, they look at four things.
1. Credit
How you've handled debt in the past.
2. Capacity
Your income, and how much of it already goes to debts.
3. Capital
Your savings: the down payment, closing costs and money left over.
4. Collateral
The home itself and what it's worth.
Credit: your track record
Your credit score is a three-digit number, usually from 300 to 850, built from your credit reports. The biggest piece is payment history: do you pay on time? How much of your available credit you use, how long you've had credit, and recent new accounts also count. A higher score can open more loan options and better pricing. Minimums vary by program and lender. For example, FHA's published rules allow 3.5% down with a score of 580 or higher. Learn how scores work and how to fix report errors in our credit education hub.
Capacity: your income and debts
Lenders want steady income that's likely to continue. They compare your monthly debt payments, including the new house payment, with your monthly income before taxes. That's your debt-to-income ratio (DTI). Lesson 3 explains DTI step by step.
Job history matters too. Lenders commonly look at about two years of work history. That doesn't have to be the same job. A new job in the same line of work is usually fine, and gaps can often be explained in writing.
How you prove income depends on how you're paid. If you get a paycheck, expect to show recent pay stubs and W-2 forms. If you're self-employed, lenders usually ask for tax returns, and some programs use bank statements instead.
Capital and collateral: your cash and the home
Capital is the money you bring: your down payment, closing costs and reserves, which are savings left over after closing (often measured in months of house payments). Lenders check bank statements to see where the money came from.
Collateral is the home. An appraisal estimates its value. The lender then compares the loan with that value. This is the loan-to-value ratio (LTV). A lower LTV means you have more of your own money in the home, which lowers the lender's risk.
Worked example: figuring LTV
| Home price (and appraised value) | $400,000 |
|---|---|
| Your down payment | $40,000 (10%) |
| Loan amount | $400,000 − $40,000 = $360,000 |
| LTV | $360,000 ÷ $400,000 = 90% |
At 90% LTV, many loans add mortgage insurance. If the home appraised for less, say $390,000, lenders generally use the lower of the price or the appraised value, so the same $360,000 loan would be about 92.3% LTV.
What this means for you
You can prepare for all four before you apply. Check your credit reports for errors. Add up your monthly debts. Keep your savings in your account where a lender can see them. And know roughly how much you can put down. Every lender weighs these a little differently, so a "no" from one doesn't mean a "no" everywhere.
Mistakes to avoid
- Opening new credit cards or financing a car or furniture while you're applying.
- Making large deposits you can't explain with a paper trail, like cash from a relative with no gift letter.
- Changing jobs, or switching from a paycheck to self-employment, in the middle of the process without telling your lender first.
- Missing a payment on any account, even a small one.
- Moving money around between accounts without keeping the statements.
Words to know
- Credit score
- Payment history
- Debt-to-income ratio
- Reserves
- Appraisal
- Loan-to-value ratio
- Underwriting
See the full mortgage glossary →
Frequently asked questions
What credit score do I need to buy a house?
It depends on the loan program and the lender. For example, FHA's published rules allow 3.5% down with a score of 580 or higher. Other programs and lenders set their own minimums, and a higher score can mean better options.
Does checking my own credit lower my score?
No. Checking your own credit is a soft inquiry and does not affect your score. A lender's credit check for a loan application is a hard inquiry, which may lower a score a little.
How long do I need to be at my job?
Lenders commonly look at about two years of work history, but not necessarily at the same job. A new job in the same field is often fine. Gaps can often be explained in a letter.
Can I get a mortgage if I'm self-employed?
Yes, often. Lenders usually review your tax returns. Some programs use bank statements to show income instead. Lesson 8 covers these options.
Sources
- CFPB: Regulation Z §1026.43, ability-to-repay rule
- CFPB: What happens when a mortgage lender checks my credit?
- FHFA: Credit scores
- HUD: FHA Single Family Housing Policy Handbook 4000.1
Educational information only, not an offer, approval or financial advice. LoanFight is not a lender; we review your scenario before connecting you with an appropriate lending partner.
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