## How Lenders Calculate Mortgage Approval
When you apply for a mortgage, the lender will assess your financial situation to determine whether you are a good risk. They will consider your income, debts, assets, and credit history to calculate your debt-to-income ratio (DTI) and determine your eligibility for a loan.
### Debt-to-Income Ratio (DTI)
Your DTI is a measure of how much of your monthly income is spent on debt payments. Lenders typically want to see a DTI of 36% or less, although some may consider applicants with DTIs up to 43%. To calculate your DTI, add up all of your monthly debt payments, including:
* Mortgage or rent
* Car payments
* Credit card payments
* Student loans
* Personal loans
Then, divide the total by your monthly gross income. For example, if your monthly debt payments are $1,000 and your monthly gross income is $3,000, your DTI would be 33%.
### Income and Employment
Lenders will also consider your income and employment history to assess your ability to repay the loan. They will typically want to see a steady income from a reliable source for at least two years. If you are self-employed, you may need to provide additional documentation, such as tax returns or financial statements.
### Assets and Credit History
Your assets and credit history can also affect your mortgage approval. Lenders will look at your savings, investments, and other assets to determine if you have the financial resources to make a down payment and cover closing costs. They will also review your credit history to assess your reliability as a borrower.
### The Mortgage Approval Process
The mortgage approval process typically involves the following steps:
1. **Pre-approval:** This is a preliminary step in which you provide the lender with some basic information about your financial situation. The lender will then give you an estimate of how much you can borrow.
2. **Loan application:** Once you have found a home, you will need to submit a formal loan application. This will include more detailed information about your finances, including your income, debts, assets, and credit history.
3. **Credit check:** The lender will order a credit report from one or more credit bureaus. This report will show your credit history, including your payment history, outstanding balances, and any liens or judgments.
4. **Appraisal:** The lender will order an appraisal of the home you are purchasing. This will determine the value of the home and ensure that it is worth the amount you are borrowing.
5. **Loan approval:** Once the lender has reviewed all of your information, they will make a decision on whether to approve your loan. If your loan is approved, you will receive a loan commitment letter.
### Getting Pre-Approved
Getting pre-approved for a mortgage can give you a competitive advantage when you are shopping for a home. It shows sellers that you are a serious buyer and that you have the financial resources to purchase their home. To get pre-approved, you will need to provide the lender with some basic information about your financial situation, including:
* Your income
* Your debts
* Your assets
* Your credit history
The lender will then give you an estimate of how much you can borrow. This will help you narrow down your search for a home and make an informed decision about what you can afford.
### Tips for Mortgage Approval
If you are planning to apply for a mortgage, there are several things you can do to improve your chances of approval:
* **Check your credit report:** Before you apply for a loan, obtain a copy of your credit report from one or more credit bureaus. Review the report carefully for any errors or inaccuracies. If you find any errors, contact the credit bureau to have them corrected.
* **Pay down debt:** If you have a high DTI, try to pay down some of your debt before you apply for a loan. This will lower your DTI and make you a more attractive borrower to lenders.
* **Save for a down payment:** A larger down payment will reduce the amount of money you need to borrow and lower your monthly mortgage payments. Aim to save at least 20% of the purchase price of the home you are purchasing.
* **Get a steady income:** Lenders want to see that you have a stable income that will allow you to make your mortgage payments on time. If you are self-employed, make sure you have a history of consistent income.
* **Build a good credit history:** Your credit history is one of the most important factors that lenders consider when making a decision on your loan application. Make sure you pay your bills on time, keep your credit utilization low, and avoid opening too many new credit accounts.
By following these tips, you can increase your chances of getting approved for a mortgage and securing the best possible loan terms.