What banks check before they say yes
Whether you can buy a house depends on what a lender will lend you, not on what you want to spend. A bank looks at three things: how much money you make, how much debt you already carry, and whether you have saved money for a down payment. If your income is too low relative to the loan size, or your existing debts are too high, or you have saved almost nothing, a lender will say no. There is no single rule that applies everywhere—different lenders have different thresholds—but the mechanics are the same at every bank.
The most common reason someone cannot buy a house is that their debt-to-income ratio is too high. This is the percentage of your monthly income that goes to debt payments. Most lenders will not lend you money for a mortgage if your total monthly debt payments (car loans, credit cards, student loans, the new mortgage) would be more than 43 percent of your gross monthly income. Some lenders go as low as 36 percent. If you make $4,000 a month and already owe $1,200 in car and credit card payments, a lender will not give you a mortgage payment larger than about $500, because $1,200 plus $500 equals $1,700, which is 42.5 percent of $4,000.
The second barrier is the down payment. Most mortgages require you to put down between 3 and 20 percent of the home's purchase price upfront. On a $300,000 house, that means $9,000 to $60,000 out of your own pocket before the bank lends you anything. If you do not have that money saved, you cannot buy yet, no matter what your income is.
Key Takeaways
- Lenders check your debt-to-income ratio—the percentage of your monthly income that goes to debt payments—and most will not lend if that ratio would exceed 43 percent once you add a mortgage.
- You need to have saved a down payment, typically between 3 and 20 percent of the home price, before any lender will consider you.
- Your credit score matters because it determines the interest rate you will pay; a lower score means a higher rate and higher monthly payments.
- Lenders verify your income through tax returns and pay stubs, so self-employed people and recent job changers often face extra scrutiny.
- The answer to whether you can buy is specific to your situation—talking to a mortgage lender about your actual numbers is the only way to know.
How your credit score affects what you can borrow
Your credit score is a three-digit number that lenders use to decide how risky you are. The higher the score, the lower the risk, and the lower the interest rate they will offer you. Most lenders require a credit score of at least 620 to consider you for a mortgage, but scores below 700 will cost you significantly more in interest over the life of the loan.
The difference between a 650 score and a 750 score can mean paying 0.5 to 1 percent more in interest annually. On a $300,000 mortgage, that difference adds up to $1,500 to $3,000 per year in extra payments. Your credit score comes from three major bureaus—Equifax, Experian, and TransUnion—and reflects your history of paying bills on time, how much debt you carry relative to your credit limits, and how long you have had credit accounts open.
If your score is below 620, most traditional lenders will not work with you. If it is between 620 and 680, you will pay higher rates and may need a larger down payment. If it is above 700, you are in the range where most lenders offer their best terms.
What lenders need to verify about your income
A lender will not take your word for what you earn. They will ask for your last two years of tax returns, your most recent pay stubs, and a letter from your employer confirming your job title and salary. If you are self-employed, the process takes longer because lenders want to see profit-and-loss statements and sometimes bank statements to confirm that your income is stable.
If you changed jobs in the last two years, lenders will scrutinize the change. Some require that you have been in your current job for at least two years. Others will accept a job change if the new job is in the same field and pays the same or more. If you took a pay cut or switched careers, you may not be able to borrow as much, or you may not be able to borrow at all.
Bonus income, commission, and overtime are treated differently by different lenders. Some will count it only if you have received it for at least two years. Others will not count it at all. This matters because if half your income comes from commission and a lender will not count it, your borrowing power is cut in half.
The down payment: how much you need and where it comes from
The down payment is the money you put toward the house price; the bank lends you the rest. A 3 percent down payment means you pay 3 percent and borrow 97 percent. A 20 percent down payment means you pay 20 percent and borrow 80 percent.
The lower your down payment, the higher your monthly payment will be, because you are borrowing more. The lower your down payment, the higher your interest rate will be, because the lender sees you as riskier. And if your down payment is less than 20 percent, you will have to pay mortgage insurance—a monthly fee that protects the lender if you stop paying. On a $300,000 house with a 5 percent down payment, mortgage insurance can add $150 to $300 per month to your payment.
Lenders want to see that the down payment comes from your own savings, not from a loan. If you borrowed the money from someone else, the lender will count that borrowed money as debt and it will raise your debt-to-income ratio. Some lenders allow a family member to give you the down payment as a gift, but they will ask for a letter from that person stating it is a gift and not a loan you have to repay.
Why recent bankruptcy or missed payments block you
If you filed for bankruptcy in the last seven years, most lenders will not work with you. If you filed more than seven years ago, some lenders will consider you, but your interest rate will be higher and you may need a larger down payment. The older the bankruptcy, the less it matters.
Missed mortgage payments, foreclosures, and late payments on other debts stay on your credit report for seven years. During that time, lenders will either reject you outright or offer you much worse terms. After seven years, the negative marks fall off your report and lenders treat you like anyone else with your current credit score.
If you have missed payments or defaulted on a loan in the last two years, you are unlikely to find a lender willing to work with you. If the missed payments are three to seven years old, some lenders will consider you, but expect higher rates and the requirement for a larger down payment.
How to find out what you can actually borrow
The only way to know whether you can buy a house is to talk to a mortgage lender. You can start with your own bank, a credit union, or a mortgage broker who works with multiple lenders. When you contact them, they will ask about your income, debts, savings, and credit situation. Some will give you a preliminary answer over the phone. Others will ask you to fill out a formal application.
A pre-qualification is an informal estimate based on what you tell them. It takes a few minutes and does not require any documents. A pre-approval is a formal commitment based on verified information—your tax returns, pay stubs, and a credit check. Pre-approval takes a few days and shows sellers that you are serious and that a lender has already checked your numbers.
Getting pre-approved does not obligate you to borrow from that lender, and it does not lock you into a specific interest rate. It simply tells you what amount you can borrow and gives you a realistic picture of what you can afford. This is the information you need before you start looking at houses.
What changes your borrowing power after pre-approval
Once you are pre-approved, your borrowing power can change if your financial situation changes. If you take on new debt—a car loan, a credit card balance, a personal loan—your debt-to-income ratio goes up and you may be able to borrow less. If you miss a payment on anything, your credit score drops and your interest rate goes up. If you lose your job or change jobs, the lender will re-verify your income.
For this reason, lenders often re-check your credit and income right before closing on the house, sometimes just days before you sign the final papers. If something has changed, they may reduce the amount they will lend you or ask you to bring more money to closing. This is rare, but it happens, which is why financial advisors recommend not making big purchases or taking on new debt between pre-approval and closing.
Frequently Asked Questions
What if I have student loans? Do they count against me?
Yes. Student loan payments count as debt in your debt-to-income ratio, even if you are on an income-driven repayment plan that makes the payment very small. Lenders use the standard 10-year repayment amount, not your actual payment, so the impact can be larger than you expect. Paying down student loans before you apply for a mortgage will improve your borrowing power.
Can I buy a house with no credit history?
Most lenders require a credit score, which means you need at least some credit history. If you have never borrowed money or used a credit card, you do not have a score. Some lenders will work with you if you can show a history of paying rent and utilities on time, but this is rare. Building credit by getting a credit card and using it responsibly for six months to a year is usually the first step.
Does my spouse's income count if we are not married yet?
No. Only income in your name counts. If you are married, your spouse's income and debts both count, whether you want them to or not. If you are engaged or in a long-term relationship but not married, your partner's income does not help you and their debts do not hurt you—the lender only looks at your individual finances.
What if I have been denied by one lender?
Different lenders have different standards. Being denied by one bank does not mean you will be denied by all of them. A mortgage broker can shop your application to multiple lenders and may find one willing to work with you. However, each lender will pull your credit report, which creates a small temporary dip in your score. Limit your applications to a two-week window so multiple pulls count as a single inquiry.
Can I buy a house if I am self-employed?
Yes, but it takes longer and requires more documentation. Lenders want to see two years of tax returns and sometimes bank statements to confirm your income is stable. If your income has been declining, lenders may use an average of the two years rather than your most recent year, which could reduce your borrowing power. Some lenders specialize in self-employed borrowers and have faster processes.