What banks check before they say yes to a mortgage
Whether you can buy a home depends on what a lender decides when you apply for a mortgage. Lenders look at three main things: how much money you make, how much debt you already have, and your history of paying bills on time. They also want to know you have money saved for a down payment. None of these are pass-or-fail tests—lenders weight them differently, and different lenders have different standards.
The process starts with a pre-qualification conversation, where a lender asks about your income and debts but does not verify anything yet. That gives you a rough idea of what price range might work. A pre-approval comes next: the lender actually checks your credit report, asks for pay stubs and tax returns, and tells you in writing how much they will lend. Pre-approval takes a few days to a week. You cannot make an offer on a house without it.
Key Takeaways
- Lenders check your income, existing debts, credit history, and down payment savings—not one of these alone decides whether you can borrow.
- Your debt-to-income ratio (how much you owe monthly compared to what you earn) is usually the biggest barrier, and most lenders want it below 43 percent.
- A down payment of 3 to 20 percent of the home price is typical, though some programs allow lower amounts if your credit is strong.
- Your credit score matters, but it is not the only thing lenders look at—someone with a 620 score and stable income may get approved where someone with a 750 score and high debt will not.
- Getting pre-approved in writing is the only way to know what a lender will actually lend you, and you need it before making an offer.
How lenders calculate what you can afford
Lenders use a formula called the debt-to-income ratio to decide how much to lend you. They add up all your monthly debt payments—car loans, student loans, credit cards, child support—and divide by your gross monthly income (what you earn before taxes). Most lenders will not go above 43 percent. Some will go to 50 percent if your credit is very strong and you have savings left over after the down payment.
Here is what that means in practice. If you earn $5,000 a month gross, your total monthly debts can be around $2,150 to stay under 43 percent. If you already owe $800 a month on a car and $300 on student loans, you have $1,050 left for a mortgage payment. A lender can then work backward to tell you what home price that supports—usually around $200,000 to $250,000 depending on interest rates and down payment.
The mortgage payment itself includes four things: principal (the loan amount), interest, property taxes, and homeowners insurance. Lenders call this PITI. Property taxes and insurance vary wildly by location, so a $300,000 house in one state might have a $1,200 monthly payment while the same house elsewhere costs $1,600 a month. A lender in your area knows these numbers and will factor them in.
What your credit report reveals
Your credit report is a record of every loan, credit card, and bill you have had for the past seven years. It shows whether you paid on time, how much you owe right now, and how much credit is available to you. Lenders pull this report and use it to calculate your credit score—a number between 300 and 850 that summarizes your payment history.
Most lenders want a credit score of at least 620 to consider a mortgage, though 640 to 660 is more common for conventional loans. Some government-backed programs (FHA loans, VA loans) accept lower scores. A higher score usually gets you a lower interest rate, which saves you tens of thousands of dollars over the life of the loan. The difference between a 620 score and a 750 score can be 1 to 2 percentage points in interest rate.
What matters most on your report is whether you paid bills on time. A single late payment from five years ago hurts less than recent missed payments. Collections accounts, foreclosures, and bankruptcies stay on your report for seven years and make borrowing much harder. If you have these, some lenders will still work with you, but you will pay a higher interest rate or need a larger down payment.
Down payment: how much you need to save
A down payment is money you put toward the house price upfront. The rest comes from the mortgage. Down payments range from 3 percent to 20 percent of the home price, depending on the loan type and your credit score.
Conventional loans (the most common type, not backed by the government) usually require 5 to 20 percent down. FHA loans, which are backed by the Federal Housing Administration, allow as little as 3.5 percent down but charge an extra insurance fee every month for the life of the loan. VA loans, for military members and veterans, sometimes allow zero down. USDA loans, for rural areas, also allow zero down in some cases.
The lower your down payment, the higher your monthly payment and the more interest you pay overall. A 3 percent down payment also triggers private mortgage insurance (PMI), an extra monthly cost that protects the lender if you stop paying. PMI usually costs 0.5 to 1 percent of the loan amount per year. You can remove it once you own 20 percent of the home's value, which takes years if you put down only 3 percent.
Income verification and what lenders actually need
Lenders do not take your word for how much you earn. They ask for recent pay stubs (usually the last two months), W-2 forms from the past two years, and sometimes a letter from your employer confirming your job and salary. If you are self-employed, you need tax returns from the past two years and sometimes a profit-and-loss statement.
Income has to be stable or growing. A lender will hesitate if you changed jobs recently, took a pay cut, or work in an industry with high turnover. If you just started a new job, some lenders want to see a job offer letter or a history of working in the same field. Bonus income and commission count, but lenders average it over two years—if you earned $10,000 in bonuses last year and $5,000 the year before, they count $7,500.
If you have been unemployed or had a gap in work, be ready to explain it. A lender will ask for a written explanation. A gap of a few months due to job transition is usually fine. A longer gap or frequent job changes raise red flags.
Savings and reserves matter too
Lenders want to see that you have money left over after the down payment and closing costs. This is called reserves. Having reserves shows you can handle unexpected expenses—a roof repair, a job loss—without missing a mortgage payment. Lenders typically want to see two to six months of mortgage payments in savings, though this varies by loan type and lender.
If you are putting down 20 percent or more, reserves matter less. If you are putting down 3 to 5 percent, lenders look at reserves more carefully. Some lenders will approve you without reserves if your credit score is very high and your debt-to-income ratio is low. Others will not budge.
Reserves can be in a savings account, checking account, money market account, or retirement account (though some lenders count retirement accounts at a reduced value). They cannot be borrowed money. If someone is giving you a gift for the down payment, that is fine, but you still need your own reserves.
What can disqualify you or make it much harder
Recent bankruptcy, foreclosure, or short sale makes borrowing harder but not impossible. Most lenders want to see at least two years pass after a bankruptcy before they will lend to you. After a foreclosure or short sale, the wait is usually three to seven years, depending on the loan type. FHA loans are sometimes more flexible on timing.
A very high debt-to-income ratio is the most common reason lenders say no. If you owe too much already, paying down debt before applying makes a real difference. Paying off a car loan or credit card can lower your ratio enough to may have access to.
Recent late payments, collections accounts, or charge-offs (accounts the lender gave up on) make approval harder. If these are recent (within the past year), many lenders will decline. If they are older, you may still may have access to, but at a higher interest rate.
Unstable income or frequent job changes raise concerns. If you work in commission-based sales or seasonal work, lenders want to see two years of history showing the income is consistent enough to count on.
The difference between pre-qualification and pre-approval
Pre-qualification is a conversation. You tell a lender about your income, debts, and credit, and they give you a rough estimate of what you might borrow. It takes minutes and does not require any documents. It is useful for getting a sense of your range, but it is not a promise.
Pre-approval is formal. The lender pulls your credit report, asks for documents (pay stubs, tax returns, bank statements), and verifies everything. They then issue a letter saying they will lend you a specific amount at a specific interest rate, good for 60 to 90 days. Pre-approval takes three to seven business days. You cannot make a serious offer on a house without it—sellers and real estate agents will not take you seriously.
Pre-approval is not the same as final approval. The lender will do another check closer to closing to make sure nothing has changed (no new debts, no missed payments, no job loss). But pre-approval is the realistic number.
Frequently Asked Questions
What if I have no credit history or a very short credit history?
Lenders prefer to see at least three years of credit history. If you have none, you can build it by opening a credit card and using it responsibly for several months before applying for a mortgage. Some lenders will consider alternative credit (rent payments, utility bills, phone bills) if you have no traditional credit history, though this is less common.
Can I get a mortgage if I am self-employed?
Yes, but lenders require more documentation. You will need tax returns from the past two years, sometimes three. If your income has been growing, that helps. If it has been declining, lenders may count a lower average. Some lenders want to see a profit-and-loss statement or business tax return as well.
Does being married or unmarried change what I can borrow?
Lenders look at the person or people on the loan application. If you are married and both applying, they count both incomes and both debts. If you are applying alone, only your income and debts count. Some couples apply separately if one person has much better credit or lower debt, though this is less common now.
What happens if I get a new job right before applying for a mortgage?
Most lenders want to see you in a job for at least two years, or at least one year if you are moving within the same field. A job offer letter can help, but some lenders will still want to wait. If the new job pays significantly more, that can work in your favor. If it pays less or is in a different field, lenders may hesitate.
Can I buy a home if I have student loan debt?
Yes. Student loans count toward your debt-to-income ratio, but they do not automatically disqualify you. If your income is high enough relative to your total debts, you can still may have access to. Paying down student loans before applying can improve your ratio and help you may have access to for a larger mortgage.