What lenders actually look at when you explore for a mortgage
A mortgage lender does not decide whether to lend you money based on how much you want the house or how long you have been saving. They decide based on three things: whether you can prove you have enough income to make the monthly payment, whether you have enough cash on hand to put down as a down payment, and whether your credit history shows you have paid other debts on time in the past.
The lender will ask for documents that prove all three of these things. They will verify your income directly with your employer or the IRS. They will check your credit report from one of the three major credit bureaus. They will look at your bank statements to confirm the down payment money is actually yours and not borrowed. If all three check out, you move forward. If one does not, the lender will either deny you or ask you to fix the problem and reapply.
The entire process typically takes 30 to 45 days from process to closing, though this varies by lender and by how quickly you provide documents. The lender will lock in an interest rate for you during this time, usually for 30, 45, or 60 days. If rates drop during that period, you cannot take advantage of them. If rates rise, you are protected.
Key Takeaways
- Lenders verify your income with your employer or the IRS, so you must have been in your current job for at least two years or be able to explain a recent job change.
- Your credit score matters because it reflects your history of paying debts on time, and most lenders require a score of at least 620, though 740 or higher gets you better interest rates.
- You will need a down payment of 3 to 20 percent of the home price, and the lender will require proof that this money is yours and not a loan.
- The lender will order an appraisal to confirm the house is worth at least what you are paying for it, and if it is not, you will need to renegotiate or bring more cash to closing.
- You must lock in your interest rate during the process process, and this lock typically lasts 30 to 60 days.
Income verification: what lenders need to see
The lender will ask for your most recent two years of tax returns, your most recent two months of pay stubs, and a letter from your employer confirming your current job title, salary, and start date. If you are self-employed, you will need two years of tax returns and possibly a profit-and-loss statement for the current year. If you receive income from Social Security, disability, alimony, or child support, you can count that too — bring the award letter or bank statements showing regular deposits.
If you changed jobs within the past two years, the lender will want to know why. A promotion or a move to a similar role at a different company is usually fine. A career change or a gap in employment requires explanation and may slow down approval. If you have been at your current job for less than two years, some lenders will still work with you, but they may require a letter from your new employer stating that you are a permanent employee, not temporary or on probation.
The lender calculates your debt-to-income ratio by adding up all your monthly debt payments — car loans, credit cards, student loans, child support, and the new mortgage payment — and dividing by your gross monthly income. Most lenders want this ratio to be 43 percent or lower, though some will go to 50 percent if your credit is strong. If your ratio is too high, you can either pay down existing debts before explore or look for a less expensive house.
Credit score and credit history: what counts and what does not
Your credit score is a three-digit number generated by Equifax, Experian, or TransUnion based on your payment history, the amount of debt you currently carry, the length of your credit history, and the mix of different types of credit you use. Most mortgage lenders pull your score from all three bureaus and use the middle score. A score of 620 or higher usually qualifies you for a loan, but 740 or higher gets you significantly better interest rates — sometimes a full percentage point lower, which saves tens of thousands of dollars over the life of the loan.
Late payments hurt your score, but the damage fades over time. A payment that is 30 days late from five years ago matters less than one from six months ago. Missed payments, collections accounts, and foreclosures stay on your report for seven years, though their impact weakens as time passes. Bankruptcy stays for seven to ten years depending on the type.
Closing old credit card accounts does not help your score the way many people think — it actually can hurt it by reducing the total credit available to you. Paying off a credit card to zero is fine, but closing the account is not necessary. The lender cares that you paid on time, not that you closed the account.
Down payment and cash reserves: how much you need
The down payment is the cash you bring to closing. It is typically 3 to 20 percent of the home price. A 3 percent down payment on a $300,000 house is $9,000. A 20 percent down payment is $60,000. The larger your down payment, the lower your monthly payment and the better your interest rate. If you put down less than 20 percent, you will pay for mortgage insurance, which is an additional monthly fee that protects the lender if you stop paying.
The lender will require proof that this money is yours. You will provide bank statements from the past two months showing the funds sitting in your account. If someone gave you money as a gift, you will need a signed letter from that person stating it is a gift and not a loan you have to repay. If you recently sold another property or received an inheritance, bring the closing statement or the inheritance documentation.
Some lenders also look at cash reserves — money left in your accounts after closing. If you have six months of mortgage payments sitting in savings after you buy the house, that is a strong signal you can handle the payment even if you lose your job. This is not required, but it helps if your process is borderline.
The appraisal: why the house price matters to the lender
Once you make an offer and it is accepted, the lender orders an appraisal. An independent appraiser visits the house, measures it, looks at comparable sales in the neighborhood, and writes a report stating what they believe the house is worth. The lender uses this number to decide how much they will actually lend you.
If the appraisal comes in lower than the purchase price, you have three options: renegotiate the price down with the seller, bring more cash to closing to make up the difference, or walk away. For example, if you agreed to pay $300,000 but the appraisal says the house is worth $280,000, and you put down 10 percent, the lender will only lend you $252,000 instead of $270,000. You would need to bring an extra $18,000 in cash to closing, or ask the seller to drop the price.
Appraisals typically take one to two weeks and cost $400 to $600. This fee comes out of your closing costs. If the appraisal is low and you decide to walk away, you lose this fee.
Interest rates and rate locks: what happens during the process
When you explore for a mortgage, you will see a list of interest rates the lender offers. The rate depends on the loan type (30-year fixed, 15-year fixed, adjustable-rate), your credit score, your down payment size, and current market conditions. A borrower with a 750 credit score and 20 percent down might get 6.5 percent, while a borrower with a 650 score and 5 percent down might get 7.2 percent for the same loan.
You choose a rate and the lender locks it in for a set number of days — usually 30, 45, or 60. During this lock period, if interest rates drop, your rate does not change. If rates rise, you are protected. If you have not closed by the time the lock expires, the lender will ask you to either extend the lock (which may cost a fee) or accept a new rate based on current market conditions.
Some lenders offer a "float down" option, which allows you to take advantage of a rate drop during your lock period. This usually costs an extra fee upfront, typically 0.25 to 0.5 percent of the loan amount. Whether this is worth it depends on whether you think rates will drop and how long you plan to stay in the house.
What happens if the lender says no
If the lender denies your process, they must tell you why. Common reasons are a credit score that is too low, a debt-to-income ratio that is too high, an appraisal that came in too low, or income that cannot be verified. Some of these you can fix before reapplying.
If your credit score is the problem, you can pay down credit card balances to lower your debt-to-income ratio and wait a few months for late payments to age. If your income cannot be verified because you changed jobs, you can wait until you have been in the new job for two years. If the appraisal is low, you can renegotiate the purchase price or find a different house.
If you cannot fix the problem yourself, you can look for a co-signer — someone with stronger credit or income who agrees to be responsible for the loan if you do not pay. A co-signer is typically a family member, and they will need to provide the same documents you did. Some lenders also offer loans specifically for borrowers with lower credit scores or higher debt ratios, though these come with higher interest rates.
Frequently Asked Questions
Do I need a 20 percent down payment to get approved?
No. Most lenders will approve you with 3 to 5 percent down, though you will pay mortgage insurance on top of your monthly payment. The tradeoff is that a larger down payment lowers your monthly cost and gets you a better interest rate, so it is worth saving for if you can.
How long does the whole process take?
From process to closing usually takes 30 to 45 days. This assumes you provide documents quickly and there are no problems with the appraisal or income verification. If the appraisal is low or your employment history is complicated, it can stretch to 60 days.
What if I have bad credit but I have been paying my bills on time for the past year?
Recent on-time payments help, but most lenders still want to see at least two years of good history before they approve you. Some lenders specialize in borrowers with lower credit scores and will work with you sooner, though you will pay a higher interest rate. The better your score, the better your rate.
Can I get approved if I am self-employed?
Yes, but you will need to provide two years of tax returns and possibly a profit-and-loss statement for the current year. The lender will average your income over two years, so if your business is growing, your approved loan amount might be lower than you expect. Some lenders also require self-employed borrowers to have higher credit scores or larger down payments.
What if the appraisal comes in low?
You can renegotiate the purchase price with the seller, bring more cash to closing to make up the difference, or walk away from the deal. If you walk away, you lose the appraisal fee but you are not obligated to buy a house that is worth less than you agreed to pay.