Understanding Mortgage Approvals: Amounts, Factors, And Your Eligibility

When it comes to mortgages, lenders will consider a range of factors to determine the amount they will approve. The process can be confusing and intimidating, but it doesn't have to be. Lenders will review applications carefully, taking into account criteria such as credit history and score, income, employment, savings, assets, and the down payment amount. They will also assess the loan-to-value (LTV) ratio, which compares the loan amount to the value of the home, with a lower LTV ratio being preferable. Additionally, lenders will calculate the debt-to-income (DTI) ratio to understand how the borrower's income is allocated towards debt repayment. While a qualified borrower may be approved for the maximum amount a lender believes they can afford, it is important to consider one's budget and financial freedom when deciding on a mortgage.

Debt-to-income ratio

When it comes to mortgages, lenders want to be confident that the loan will be a priority for the borrower. To assess this, they will look at your debt-to-income ratio (DTI). This is calculated by dividing your total monthly debt payments by your total monthly pre-tax income. Lenders use this ratio to understand how much of your income is going towards paying off debts.

Lenders typically require a DTI of under 43%, with some placing the limit at 36%. A lower DTI indicates a better chance of mortgage approval. If your DTI exceeds 36%, you may face higher interest rates or be denied a mortgage altogether. It is recommended that your mortgage payment should be about 28-31% of your gross monthly income. For example, if you earn $5,000 a month, your mortgage payment should be between $1,400 and $1,550.

To improve your DTI, you can work on paying off your debt, especially credit card debt, and increasing your income. It is also important to avoid taking on new debt obligations as you prepare to apply for a mortgage.

Lenders will also consider other factors, such as your credit score, income, employment history, assets, savings, and down payment amount. Your credit score is an important indicator of your credit risk, with a higher score suggesting lower risk. Lenders will also look at how you have handled past debts, including your payment history and whether you have made larger payments to reduce debt more quickly.

Credit score

Lenders are interested in the applicant's credit history and how they have handled past debts. They look at the applicant's borrowing habits, including whether they make payments on time and whether they make larger payments to reduce their debt. Lenders also look at the applicant's debt-to-income (DTI) ratio, which is calculated by dividing the total amount of monthly debt payments by the total monthly pre-tax income. Lenders prefer a DTI of 43% or less, and a lower DTI means the applicant can borrow more.

A good credit score is essential for getting a bigger loan amount, as it indicates to lenders that the borrower is not a risky prospect. Lenders want to be confident that the borrower will make payments consistently and on time and that the loan will be a priority for them. Therefore, a positive credit history and a strong credit report are crucial for getting a mortgage approved for a higher amount.

Employment history

Lenders will verify your employment when you apply for a mortgage and again shortly before your scheduled mortgage closing date. They will also want to see proof of income. If you are self-employed, a freelancer, or work on commission, lenders may view your income as less stable, and you may be required to provide a longer work history—sometimes as much as double the standard two years.

Gaps in your employment history are not necessarily a deal-breaker. Lenders are understanding of common and logical gaps, such as maternity leave, layoffs, returning to school, or temporary disability. If you have been out of work for a month or two, this may not impact your application. Gaps of six months or more may require additional documentation and explanation. If you can show proof that you made consistent rent or mortgage payments during your time off, that can also be helpful.

If you have changed jobs several times in the last two years but have not experienced an employment gap of longer than a month, you may still be well-positioned to qualify for a mortgage, especially if you have continued to advance in your career field and earn a steady or improving income. Lenders are primarily focused on the stability of your income and your prospects for continued employment.

Down payment amount

The down payment amount is a key factor in determining how much mortgage amount a lender will approve. A larger down payment lowers the loan-to-value (LTV) ratio, which is the loan amount compared to the home's value. A lower LTV means less risk for the lender, increasing the chances of loan approval.

Lenders prefer a lower LTV ratio because it indicates that the borrower has more skin in the game and is less likely to default on the loan. A higher down payment also reduces the loan amount required, which can lead to lower monthly payments and a faster repayment period.

The down payment amount is crucial in determining the overall cost of the loan. A larger down payment can help borrowers save money on interest charges over the life of the loan. Additionally, a higher down payment can provide leverage for borrowers to negotiate better loan terms and interest rates.

Lenders typically require a minimum down payment for mortgage approval. This amount varies depending on the lender and the type of loan. For example, conventional loans usually require a higher down payment than government-backed loans, such as FHA or VA loans.

It is important to note that the down payment amount is just one factor in the mortgage approval process. Lenders also consider credit history, income, debt-to-income ratio, and employment status when evaluating a borrower's ability to obtain a mortgage.

Loan-to-value ratio

When it comes to mortgages, lenders consider a range of factors to determine the loan amount. One crucial factor is the loan-to-value (LTV) ratio, which compares the loan amount to the value of the home being purchased. A lower LTV ratio is generally preferred by lenders as it indicates a reduced risk.

The LTV ratio is calculated by dividing the loan amount by the appraised value of the property. For example, if you are seeking a mortgage loan of $200,000 to purchase a home valued at $250,000, the LTV ratio would be 80% ($200,000/$250,000). Lenders typically view a lower LTV ratio as more favourable because it signifies a lower risk associated with the loan. In this case, a larger down payment can help lower the LTV ratio, making it more attractive to lenders.

The LTV ratio is an important metric for lenders when assessing mortgage applications. It provides a measure of the loan amount relative to the value of the collateral, which is the property in this case. A lower LTV ratio indicates that the borrower has more equity in the property, reducing the potential loss for the lender if the borrower defaults on the loan. This is why a lower LTV ratio can improve the chances of loan approval.

Additionally, the LTV ratio can influence the interest rate offered by the lender. A lower LTV ratio may result in a lower interest rate, making the loan more affordable for the borrower. Conversely, a higher LTV ratio may lead to a higher interest rate to compensate for the increased risk perceived by the lender.

It is worth noting that the LTV ratio is just one aspect of the mortgage approval process. Lenders also consider other factors, such as credit score, income, employment history, debt-to-income ratio, and down payment amount. These factors collectively contribute to the lender's decision on the loan amount and the terms offered to the borrower.

Frequently asked questions