Qualifying for a Mortgage

Curious what lenders look for when they review a mortgage application? Most lenders look at four basic factors, commonly known as "the four C's": Capacity, Credit, Cash, and Collateral.

Income (Capacity)

A lender will look to see whether you have a sufficient and steady source of income with which to make the proposed mortgage payments. For example, if you have worked for the same company or in the same line of work for 30 years, your application will generally be considered less risky than the application of someone who has recently started their own business. Lenders will also look at whether the proposed monthly mortgage payments will result in a significant increase in your monthly housing expense, and the percentage of your income that will be necessary to cover the mortgage payments in addition to your other monthly obligations.

Income can come from a variety of sources, including primary, second, or part-time job(s), overtime and bonuses, self-employment, commissions, rental property income, government assistance programs, or interest on asset accounts. In most cases, a lender will ask you to provide documentation of your income. For example, you might be asked to provide copies of your tax returns, W-2 forms, or a recent pay stub. If your income is not easy to document, you may be eligible for an increasing number of reduced documentation and "no documentation" mortgage programs.

Credit History

Do you consistently pay your bills on time, or do you have a pattern of late payments? Have you previously filed for bankruptcy? Have any judgments been filed against you? A lender may ask you to explain any unfavorable information that appears on your credit report. Some lenders offer special mortgage programs for homebuyers with less-than-perfect credit, although such loans tend to carry higher rates. If you have a limited credit history, a lender may allow you to demonstrate your creditworthiness by documenting a history of paying your rent, utility bills, and other obligations on time.

Cash or Capital

Do you have any money that can be used for a down payment, and if so, how much? The money you hold in any savings, checking, money market, or retirement accounts can greatly affect the strength of your application. A lender will also look to see whether you will have any reserve funds left after closing to cover unanticipated expenses, or if anything should happen to you or your job.

Property (Collateral)

Your lender will ordinarily require your home to be appraised to determine its fair market value. This is done by comparing your house to similar homes in the area that have sold within a particular time period. If you haven't decided on a property yet, you can be preapproved for a loan, subject to your finding a home within certain parameters.