When banks and mortgage companies evaluate your application for a mortgage, there is a rough formula they use to determine how credit worthy you are and whether to approve your application. Understanding this formula can help you strengthen your application and increase your chances for getting the loan you want.
In general, there are four main criteria that banks and mortgage companies use to evaluate a borrower. They are: income, assets, credit, and appraisal. Lenders do not just evaluate the quantity but also the quality of each criterion.
Income
Lenders look at how much money a borrower makes but also the stability of that income. Has the borrower earned similar amounts in past years? Is the borrower's employment status secure and have they worked at the same company for some time? Do they have a stable employment situation? A borrower who makes $10,000 in one year and $300,000 the next has the quantity but not necessarily the quality. Lenders like predictability.
Assets
How much money does an individual have in the bank and in investments? Has this amount increased steadily or because of a $50,000 gift from grandpa? Lenders like to see stable, year-over-year increases in assets. One time gifts do not provide the same level of comfort that the borrower can continue to increase savings every year.
Credit
Lenders look not only at the credit score, but also at the credit score trends. Has the borrower maintained a high credit score over time? Does the borrower have other debts that they have responsibly paid off? Has the borrower shown that they can manage debt? Lenders prefer an individual who has responsibly managed some debt over someone who has never taken out a loan before. So, in this case some debt is better than never having debt at all.
Appraisal
The amount that a house appraises for it important, but so is the quality of the appraisal. Borrowers want to see that the appraisal was done by an independent, qualified individual who can accurately assess the value of a house. Did the appraiser take the time to really inspect the house, take pictures, and evaluate the condition of the property? Drive by appraisals are a relic of the past.
Having quantity and quality in all four categories ensures that a borrower will be approved and receive the best possible rates. That doesn’t mean that a borrower can’t get a loan if quality or quantity is slightly low in one or two categories, but the chances do go down. Evaluate your own borrowing strength using the chart below.
| Criteria | Quantity | Quality |
| Income | Lenders like to see that mortgage payments, interest, insurance, and taxes will not exceed 28% of a borrowers gross income (pre-tax) income. This is called your debt to income ratio. Income is the second most important criteria behind Appraisal value of the house. | Consistent income over time. Steady employment and stable or rising income. |
| Assets | Lenders like to see that homeowners have substantial assets. Ideally the value of the assets would cover the mortgage amount but this is not necessary. This ensures that lenders will continue to receive payments should the borrower lose their job and income. | Increasing asset growth over time is better than lump sum increases from a gift, inheritance, etc. |
| Credit | According to myFico, Credit scores over 760 help a borrower get the best rates. The myFico site shows that the difference between a 760 and 639 credit score is nearly $300 per month on the same $300,000 mortgage. | A credit report that shows a history of being able to manage debt. |
| Appraisal | A house that appraises for at least the amount of the mortgage. If not, the house is considered underwater and lenders will not approve the loan. This may be the single most important criteria. | A reputable appraisal done by an independent company. |
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