Understanding Mortgage Approval: Factors That Determine How Much You Can Borrow

## Key Factors Influencing Mortgage Approval ### Credit Score Your credit score is one of the most critical factors in determining your mortgage eligibility. Lenders use this score to assess your creditworthiness. A higher credit score often translates to better loan terms and interest rates. - **Excellent (740+)**: Best rates and terms - **Good (670-739)**: Competitive rates - **Fair (580-669)**: Higher rates, larger down payment may be required - **Poor (<580)**: Limited options, FHA loans may be available For more information on improving your credit score, consider visiting [Experian's guide on credit scores](https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/). ### Income and Employment History Lenders typically look for: * Steady employment history (usually 2+ years) * Reliable income sources * Recent pay stubs and W-2 forms * Tax returns for self-employed applicants Most lenders follow the [28/36 rule](https://www.investopedia.com/terms/t/twenty-eight-thirty-six-rule.asp), which states that your mortgage payment shouldn't exceed 28% of your gross monthly income, and total debt payments shouldn't exceed 36%. ### Debt-to-Income Ratio (DTI) DTI is a critical metric that compares your monthly debt payments to your gross monthly income. There are two types: #### Front-end DTI ``` (Monthly Housing Costs ÷ Monthly Gross Income) × 100 ``` #### Back-end DTI ``` (Total Monthly Debt Payments ÷ Monthly Gross Income) × 100 ``` Most lenders prefer a back-end DTI below 43%, though some may accept up to 50% in certain circumstances. ### Down Payment The size of your down payment affects loan approval odds, interest rates, and PMI requirements. Traditional down payment requirements: | Loan Type | Minimum Down Payment | |-----------|---------------------| | Conventional | 3-20% | | FHA | 3.5% | | VA | 0% | | USDA | 0% | ### Loan Types and Terms Different loans have varying requirements and limits. Common types include: - **Conventional Loans** - **FHA Loans** - **VA Loans** - **Jumbo Loans** For more details, visit [the Consumer Financial Protection Bureau's guide on loan types](https://www.consumerfinance.gov/owning-a-home/explore/understand-the-different-kinds-of-loans-available/). ## Additional Considerations ### Assets and Reserves Lenders evaluate your: * Checking and savings accounts * Investment portfolios * Retirement accounts * Other liquid assets Most lenders want to see enough reserves to cover 2-6 months of mortgage payments. ### Property Type and Location Different properties carry different risk levels: * Primary residences: Most favorable terms * Second homes: Higher down payment requirements * Investment properties: Strictest requirements The type and location of the property can influence the loan amount. Lenders may have different criteria for single-family homes, condos, or multi-family units. ### Documentation Requirements Be prepared to provide: * Bank statements (2-3 months) * Investment account statements * Proof of additional income * Gift letters for down payment assistance * Rental history for first-time buyers You can explore different loan options and terms on websites like [Zillow](https://www.zillow.com/mortgage-calculator/) or [LendingTree](https://www.lendingtree.com/). For further reading, explore [NerdWallet's comprehensive mortgage guide](https://www.nerdwallet.com/mortgages/mortgage-calculator).

Understanding Mortgage Approval: Factors That Determine How Much You Can Borrow

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