How to strengthen your mortgage application before you apply

Taking the leap into homeownership is one of the most exciting financial milestones you can reach. Most home buyers use a mortgage to finance their home purchase. To get approved for a mortgage, you’ll need to submit an application and meet your lender’s eligibility requirements.

When you apply for a mortgage, your lender will review your finances to confirm that you can afford your monthly payments and are a reliable borrower. Here, we’ll dig into the factors lenders consider as well as the steps you can take to boost your chances of getting approved for a mortgage.

What lenders look for in a mortgage application

Before handing over hundreds of thousands of dollars, lenders need reassurance that you can comfortably manage your monthly payments. To get this reassurance, they’ll review a variety of financial components during the underwriting process. First and foremost, lenders look at your income and assets to confirm that you can afford your mortgage. They’ll also verify your employment status to ensure you have a steady income.

When assessing your mortgage qualification, lenders also evaluate how much risk you pose as a borrower. Lenders will look at your credit score to understand how you’ve managed borrowed money in the past. They’ll also look at your debt-to-income ratio to see how much of your income gets eaten up by other debts.

Additionally, lenders will consider your current assets and cash reserves to confirm you can afford the down payment and closing costs.

Finally, the property’s characteristics and appraised value will be evaluated to ensure the home itself is a sound investment.

How to improve your mortgage eligibility

If you’re ready to buy a home and need to get a mortgage, there are certain steps you can take improve your chances of getting approved. Certain strategic moves - like reducing your debt and boosting your credit score - can also help you get the best terms possible on your mortgage.

Choose the right loan type

It’s important to know there are several types of mortgages available. The one that makes the most sense for you will depend on your finances, credit history, and priorities. Let’s take a look at the five most common loan types:

• Conventional loans: The most common loan type. Ideal for borrowers with a strong credit score and a healthy down payment, offering flexibility and competitive rates.
• FHA loans: Backed by the government, these are great for first-time buyers or those with lower credit scores who want to put down as little as 3.5%.
• VA loans: A mortgage option exclusively for eligible active-duty military members, veterans, and surviving spouses. No down payment required.
• USDA loans: Designed to help low-to-moderate-income buyers purchase homes in designated rural areas. No down payment required.
• Jumbo loan: Necessary when you’re buying an expensive property that exceeds the standard borrowing limits set by federal housing agencies.

Understand mortgage eligibility requirements

The eligibility criteria you’ll need to meet to get a mortgage will depend on your lender and loan type. Many loans require you to make a down payment and pay a percentage of the purchase price up front. Here is the minimum down payment needed for some common loan types:

• Conventional loan: 3%¹
• FHA loan: 3.5%
• VA loan: No down payment required²
• USDA loan: No down payment required

Lenders will also need you to meet a credit requirement to confirm you have a history of handling debts responsibly. Here is the minimum credit score you’ll need for common loan types:

• Conventional loan: 620
• FHA loan: 500 if your down payment is at least 10%, 580 if you’re putting at least 3.5% down
• VA loan: No set limit, though lenders typically require a minimum of 620
• USDA loan: No set limit, though lenders typically require a minimum of 620

Determine what you can afford

Before you start house-hunting, it’s important to understand how much home you can afford. Lenders will review your income and savings to make sure you can afford the loan. But it’s important to remember that the maximum amount a lender preapproves you for isn’t necessarily what you should spend. Lenders don’t know your personal spending habits, grocery bills, or child care costs. Always analyze your personal finances to determine a monthly mortgage payment that feels comfortable for your lifestyle, rather than simply maxing out your preapproved loan limit.

Taking on a mortgage is a major financial commitment. If your monthly payment is too high, you could risk becoming “house poor” - when your housing payments consume too much of your income and leave you without enough money for the rest of your budget. If you fall behind on your payments, you could default on your loan and lose the home to foreclosure.

You can use a home affordability calculator to get a clearer picture of what fits into your budget based on your income and debts.

Strengthen your credit profile

To get approved for a mortgage, you’ll need to meet the minimum credit score requirement set by your lender. Your credit score will also impact the interest rate you’re offered on a mortgage. In general, borrowers with higher credit scores get offered lower interest rates. Saving just a fraction of a percentage point on your mortgage rate can save you thousands of dollars in the long run.

If your score needs a lift, here are several ways you can work to repair your credit for a mortgage:

• Check your credit report for errors: You can request a free copy of your credit report at AnnualCreditReport.com to review and officially dispute any inaccurate negative marks.
• Pay your bills on time: Payment history has the biggest impact on your credit score, so make sure all your bills are paid by the due date.
• Improve your credit utilization: Aim to keep your credit card balances below 30% of your total credit limit.
• Keep your old accounts open: The length of your credit history matters. Closing an old credit card can shorten your history and negatively impact your score.
• Diversify your credit mix: Lenders like to see that you can responsibly handle different types of credit, such as revolving credit cards and installment loans.
• Limit new credit applications: Hard inquiries temporarily lower your score, so pause on opening new accounts while preparing to buy a home.

Reduce your debt-to-income ratio

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward paying your monthly debts. Lenders use this metric to ensure you’re not taking on more debt than you can comfortably handle to keep up with your mortgage.

You can calculate your DTI by adding up your monthly debt payments and dividing that number by your gross monthly income. When reviewing what is considered debt, remember that lenders look at fixed monthly obligations like car payments, student loans, and credit card minimums.

It’s advisable to aim to keep your DTI at 36% or less, though it’s possible to qualify for a mortgage with a DTI of up to 50%.  

You can reduce your DTI by paying down your debts or by finding ways to increase your gross monthly income before you apply.

Build your savings

Beyond your monthly mortgage payment, buying a home comes with considerable upfront costs. You to have enough saved to make your down payment, which can range from 3% to 20% the purchase price - or more depending on the loan type you choose.

You’ll also need to cover your closing costs, which are all the different fees your lender charges for originating and closing on your loan. Closing costs should not be underestimated, as they can add up to 3% to 6% of the home purchase price.

Lenders also often want to see you have enough cash reserves - extra money left in your bank account after closing - to prove you can handle sudden financial emergencies without missing a mortgage payment. That’s why a strong mortgage application is backed by a healthy savings account.

Keep your income and employment stable

The income requirements you’ll need to meet will depend on the cost of the home you’re looking to buy. It’s less about a specific dollar amount and more about proving that your income is stable, consistent, and expected to continue. Generally, lenders want to see a solid 2-year employment history in the same field. You can increase chances of mortgage approval by avoiding major career shifts right before you buy.

If you’re self-employed and work for yourself, getting a mortgage simply requires a bit more paperwork. Because your income may fluctuate, lenders will typically ask for 2 years of personal and business tax returns alongside profit-and-loss statements.

Avoid large purchases and new credit lines

Using a credit card to make a large purchase adds to your total debt and increases your DTI. Applying for new credit adds a hard inquiry to your credit report, which can temporarily lower your score. If your credit score has dropped or your DTI has spiked, it could jeopardize your chances of getting approved. Even if you’ve been previously preapproved, lenders run a final credit check before closing. That’s why it’s best to avoid making large purchases or opening a new credit line until after you’ve closed on your loan.

Gather your documentation

To conduct the underwriting process and review your finances, lenders will ask you to provide a variety of documents. Here’s what you can expect to send over:

• Pay stubs
• W-2 forms
• Tax returns
• 1099 forms
• Checking and savings account statements
• Retirement account statements
• Investment account statements
• List of monthly debts

Preparing these documents in advance can help expedite the process and get you approved that much sooner.

Get preapproved ahead of time

A mortgage preapproval is a statement from a lender stating how much money they are tentatively willing to lend you up to a certain amount. While a preapproval letter is not a guaranteed loan offer, it gives you an idea of how much you’ll be able to offer. It also shows sellers that you’re serious about buying and can likely secure financing. In fact, sellers typically require you to have preapproval before they’ll accept your offer. Getting preapproval is the first green light you need from a lender on your path to final approval.   

The bottom line: Preparation is key when you’re buying a home

You can improve your chances of getting approved for a mortgage by understanding what lenders look for and how much you can afford. Review your finances to see what kind of monthly payment you can afford and whether you meet the basic eligibility requirements. There are steps you can take to strengthen your financial standing and boost your odds of approval. By paying down your debts to lower your DTI, working to improve your credit, and gathering your paperwork early, you can set yourself up for success with a lender.

When you feel ready to take the next step on your home buying journey, you can start the mortgage application process with Rocket Mortgage today.

¹The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

²Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.