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Qualifying for a Mortgage Loan: How Lenders Think

When you apply for a mortgage, you may feel as though your fate is in the lender’s hands. You need to know the answer to the big question: Will my application be approved?

You can feel far more comfortable about the answer to this question if you know what lenders look for when reviewing applications.

The driving force for lenders is confidence that loans will be repaid. They want to feel comfortable that the loans they make are safe, so they try to determine your ability and willingness to pay. Decades of lending experience have given the lending industry a pretty good idea of what borrowers can manage, and their experience is applied today in the form of qualifying ratios that are used to determine the amount of mortgage debt a borrower can typically handle.

Housing Ratio

The first qualifying ratio is the housing ratio - the amount of money you can dedicate to housing expenses each month. It’s called a ratio because it is expressed as a percentage of your income. As a guideline, we consider 28% of gross monthly income to be the maximum acceptable housing ratio. (Dollar Bank has special mortgage programs with more lenient guidelines. Ask a Dollar Bank representative for more information.) This includes the various components of your monthly mortgage payment such as principal, interest, taxes, insurance and condominium fees. It does not include utilities, maintenance or other variable items.

If 28% of your income is dedicated to housing expense, that leaves 72% of your income to meet other expenses. Experience has proven that this is an acceptable level for many borrowers. After all, lenders recognize that you have expenses other than your mortgage payment, and they want to make certain that you are able to handle the load. Bear in mind that an acceptable housing ratio is only one step on the way to buying the home you want. Lenders will look at other items as well.

72% Federal/State Income Taxes
Food/Clothing
Other Debt
Entertainment
Utilities
Transportation
28% Housing Payment

Debt Ratio

The second qualifying ratio is the debt ratio, or the percentage of your income that you can typically spend on housing and long-term debt. Long-term debt includes car loans, student loans, credit cards and other similar debts. Any installment debt that will be paid off in less than 10 months is not included. Revolving debt is included.

The purpose of the debt ratio is to see whether a borrower is overextended with debts other than mortgage debt. While 36% of gross monthly income is considered acceptable by Dollar Bank, higher ratios wouldn’t automatically prohibit an applicant from being approved. Other factors, such as a demonstrated ability to handle large monthly payments, are also considered.

Of course, the housing and debt ratios are not the sole determinants of whether you will be approved for a mortgage.

Other Factors

In addition to qualifying ratios, lenders will look into other factors such as your credit history and employment. Items on a credit history that could be considered unfavorable include:

  • A history of slow payments
  • Previous defaults or foreclosures on mortgages
  • Loans which have been written off by the lenders as bad debts
  • Late charges
  • Bankruptcies
  • Liens
  • Repossession of credit purchases

Of course, lenders will give consideration to reasons that may explain a negative credit entry, and encourage borrowers to provide such explanations early in the application process.

Lenders also look at employment history, for example, length of time with a particular employer and stability in a particular line of work. They are also interested in your residence history.

We’re Here to Help

Even if your credit history is less than perfect, Dollar Bank is interested in helping you qualify for a mortgage. For more details, see Want to Buy a Home? Dollar Bank’s Homeownership Program Can Help. Our program is designed to help you repair (or establish) your credit history, and to assist you in designing a budget and savings plan that will help you get into a new home sooner. For more information on the Homeownership Program, please call 1-800-242-BANK and ask for Dollar Bank’s Community Development Department.

Do it Yourself

If you’d like to take a quick look at your qualifying ratios, see How Much House Can I Afford? or talk to any of our representatives. You can also try our mortgage calculators.

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