What Mortgage Lenders Actually Look at When You Apply

The five things lenders examine on every mortgage application

Lenders look at your credit score, income, debt-to-income ratio, down payment, and the property itself. These five categories determine whether you get approved, what interest rate you pay, and how much you can borrow. A strong application means high marks across all five — but one weak area doesn't automatically disqualify you if the others are solid.

The process is not mysterious. Lenders follow rules set by the investors who buy mortgages on the secondary market, and those rules are published. Understanding what they examine lets you know where you stand before you apply, and what to fix if you're not ready yet.

Key Takeaways

• Your credit score, income verification, and debt-to-income ratio are the three things lenders check first, and they matter more than anything else on your application.
• Most lenders want to see a down payment of at least 3 to 5 percent, though some programs allow lower amounts if your credit and income are strong.
• Lenders order an appraisal of the property itself — if it appraises below the purchase price, you may need to renegotiate or bring more cash to closing.
• Recent large deposits, new debt, and job changes in the months before you apply can all trigger additional questions and slow down approval.
• Pre-approval letters show what lenders are willing to lend based on a preliminary review, but final approval comes only after they verify everything and the appraisal is complete.

Credit score and credit history

Your credit score is the first number a lender pulls. Most conventional mortgages require a score of at least 620, though scores above 740 get better interest rates and require smaller down payments. The score itself is a three-digit summary of your payment history, how much debt you're carrying, and how long you've had credit accounts open.

Lenders also read your credit report — the detailed record behind the score. They look for late payments, collections, foreclosures, and bankruptcies. A bankruptcy from seven years ago matters less than one from two years ago. A single 30-day late payment from five years ago is usually not a deal-breaker if everything else is clean, but multiple recent lates will hurt your chances.

If your score is below 620, most conventional lenders will decline you. FHA loans (insured by the Federal Housing Administration) sometimes go as low as 580, but you'll pay a higher insurance premium. If your score is low, you have time to improve it before applying — paying down existing debt and making on-time payments for several months can raise your score measurably.

Income and employment verification

Lenders need to know you have steady income to repay the loan. They ask for recent pay stubs (usually the last two months), W-2 forms from the past two years, and a written verification of employment from your employer. If you're self-employed, you'll provide tax returns instead — usually the last two years.

The lender will also contact your employer directly to confirm you still work there and earn what you said you do. If you've changed jobs recently, they want to see that you're in the same field or that the new job pays at least as much as the old one. A job change to a completely different industry, or a drop in pay, can delay approval while they assess whether your income is stable.

Bonus income, commission, and overtime are counted only if you can show you've received them consistently for at least two years. If you just started a new job with commission, that income won't count yet. Rental income from a property you own counts, but only after you provide a lease and proof you've been collecting rent for at least two years.

Debt-to-income ratio

Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. Lenders add up all your monthly obligations — car loans, student loans, credit card minimums, child support, and the new mortgage payment — and divide by your gross monthly income. Most lenders want this ratio to be 43 percent or lower, though some will go to 50 percent if your credit score and down payment are strong.

This is where paying down debt before you apply makes a real difference. If you have three car loans and five credit cards, your ratio will be high even if you earn good money. Paying off a car loan or credit card before applying can lower your ratio enough to move you from "declined" to "approved," or from a higher interest rate to a lower one.

The lender calculates the new mortgage payment using the loan amount you're seeking, current interest rates, and a 30-year term. They don't use the actual rate you'll receive — they use a standard rate set by the investor guidelines. This means the calculated payment is often higher than what you'll actually pay, which gives you a small cushion.

Down payment and cash reserves

Most conventional mortgages require a down payment of at least 3 to 5 percent of the purchase price. FHA loans allow down payments as low as 3.5 percent. The larger your down payment, the less risky you look to the lender, and the better your interest rate will be.

Lenders also want to see that you have cash left over after closing — called cash reserves. If you're putting down 5 percent and have nothing left in the bank, the lender sees you as stretched thin. Most lenders want to see reserves equal to at least two months of your new mortgage payment, though this varies by loan type and your credit profile. If you have six months of reserves, you look much safer.

The lender will ask where your down payment money came from. If you received a large gift from a family member, you'll need a signed letter from them stating it's a gift and not a loan. If you withdrew money from a retirement account, you'll need documentation of that withdrawal. Lenders want to make sure you didn't borrow the down payment, which would increase your debt and your debt-to-income ratio.

The property appraisal and title search

The lender orders an independent appraisal of the property you're buying. An appraiser visits the home, measures it, photographs it, and compares it to similar homes that sold recently in the area. The appraisal determines the property's market value — and if that value is lower than the purchase price, you have a problem.

If the appraisal comes in low, you have three options: renegotiate the purchase price with the seller, bring additional cash to closing to make up the difference, or walk away (if your purchase agreement allows it). The lender will not lend more than the appraised value, so if you agreed to pay $300,000 and it appraises at $280,000, you need to either pay the $20,000 difference yourself or get the seller to lower the price.

The lender also orders a title search to make sure the seller actually owns the property and that there are no liens against it. If a contractor or tax authority has a lien on the home, that lien must be paid off at closing before you take ownership. A title search usually takes one to two weeks and costs $200 to $400, though this is often rolled into your closing costs.

Recent financial changes and red flags

Lenders scrutinize your financial activity in the months leading up to your application. A large deposit that can't be explained — say, $15,000 that suddenly appears in your account — triggers a request for documentation. They want to know if it's a gift, a loan, or income you didn't report. Unexplained deposits can delay approval by weeks while the lender investigates.

New debt is another red flag. If you open a credit card or take out a car loan in the month before you apply, your debt-to-income ratio goes up and your credit score drops slightly. Some lenders will recalculate and may decline you. Even if you don't use the new credit card, the available credit counts against you in the debt-to-income calculation.

Closing accounts can also hurt you. If you pay off a credit card and close the account to clean up your finances, your credit score may drop because you've reduced your available credit. The lender sees this as a negative change right before applying. It's better to pay down debt and leave accounts open.

Pre-approval versus final approval

A pre-approval letter means a lender has reviewed your credit, income, and debt and is willing to lend you a certain amount — usually good for 60 to 90 days. Pre-approval is not a may provide. It's based on information you provided and a preliminary credit check. The lender hasn't verified your employment, ordered an appraisal, or seen the property yet.

Final approval comes only after the lender verifies everything: they contact your employer, order the appraisal, run a title search, and pull a fresh credit report. This process usually takes 7 to 10 business days after you submit a complete application. If anything has changed — your job, your debt, your credit — the lender will ask about it.

Some lenders issue conditional approval, which means they'll approve you if you provide additional documentation or if certain conditions are met (like the appraisal coming in at value). Conditional approval is normal and not a rejection — it just means the lender needs more information before they can say yes.

Frequently Asked Questions

What credit score do I need to get a mortgage?

Most conventional lenders require a score of at least 620. FHA loans sometimes accept scores as low as 580, but you'll pay a higher insurance premium. Scores above 740 get the best interest rates and require smaller down payments. If your score is below 620, you can work on improving it before you apply.

Can I get approved if I just changed jobs?

Yes, but the lender will want to see that your new job is in the same field or pays at least as much as your previous one. They'll contact your new employer to verify you're still employed there. If you switched to a completely different career or took a pay cut, approval may take longer while they assess income stability.

What happens if the appraisal comes in lower than the purchase price?

You'll need to either renegotiate the price with the seller, bring additional cash to closing to make up the difference, or walk away if your purchase agreement allows it. The lender will not lend more than the appraised value, so you cannot borrow your way out of a low appraisal.

Do I need to tell the lender about a large deposit I made?

Yes. If you deposit a large sum of money shortly before applying, the lender will ask where it came from. Have documentation ready — a gift letter from a family member, proof of a bonus, or a bank statement from the account you transferred it from. Unexplained deposits can delay approval.

Can I open a new credit card before I apply for a mortgage?

You can, but it's not a good idea. A new credit card lowers your credit score slightly and increases your debt-to-income ratio (even if you don't use it). If you're close to the lender's debt-to-income limit, a new card could push you over and result in a decline. Wait until after closing to open new credit.