How to Be Approved for a Home Loan: 4 Things Underwriters Look For

So, you want to purchase a home or investment property, but you need to know how to be approved for a home loan first. Securing financing for your real estate ventures can sometimes feel like navigating through a maze. However, it doesn’t have to be complicated! 

In this blog post, you will learn how to set yourself up for success by focusing on the four characteristics that matter most to underwriters (the people who approve or deny your loan application.) They are:

• Credit Score
• Capacity
• Collateral
• Character

Understanding what matters to underwriters is crucial to unlocking the best financing options available to you. So, let’s get started!

How to Be Approved for a Home Loan: 4 Things Underwriters Look For

1. Credit Score: The $250,000 Score

Your credit score is your financial fingerprint, and it carries immense weight in the eyes of underwriters. A credit score of 760 and above is the golden ticket— it’s worth about $250,000 to you. 

Your credit score is comprised of five components:

• Payment History: 35% 
• Outstanding Credit Balances: 30%
• Credit History: 15%
• Number of Inquiries: 15%
• Credit Mix: 10%

So, the two main things you can do to increase your credit score are paying on time and staying under 30% of your credit limit on cards. 

Bankrate.com tells us that 25% of all credit reports contain errors that may result in being denied loans.  So, always keep a pulse on your credit report on all three credit reporting agencies: www.Experian.com, www.TransUnion.com, and www.Equifax.com. Normally, it costs about $15, but you get the report and your score. Be sure to request both. 

As you analyze your credit report, look for errors. This will help you build and maintain a stellar credit score that gives you access to multiple properties and the best financing opportunities.

2. Capacity: Debt-to-Income Ratio

The next thing you need to know for how to be approved for a home loan is how to grow your capacity. Underwriters consider your debt-to-income ratio as a key part of whether or not they accept your loan application. Underwriters always factor in ratios, which displays your income capacity to repay the loan. 

The standard guideline is no more than 28% of your monthly gross income for your mortgage payment and no more than 36% of your gross monthly income for all debts including your mortgage payment. However, this is where the credit score comes in again. Many lenders allow higher debt ratios, especially if your credit score is high.

Depending on the type of loan you apply for, underwriters will look at a number of other factors to determine your capacity. The first loan that investors could start with is what’s called the full doc loan or a full documentation loan. On this particular loan, they will ask you for documents like your past two years of tax returns and your past two months’ of pay stubs or checking account statements.

They will also do a verification of employment (VOE) and or verification of your assets (VOA). They’re looking for “seasoned funds,” which are the funds that would be used for your down payment and six months of mortgage payments. They want to see these funds “seasoned” or have been at that particular balance in your name for the past 60 days. Sometimes, they will do what’s called an average balance to determine that the funds have been sitting there for at least 60 days. This lets them know that you have the capacity to repay the loan.

Want to make sure you’re covering your bases when it comes to buying real estate? Download our free Real Estate Quick Start Checklist for help with financing details, securing your property, and more. Just fill out the form below to get your free guide.

3. Collateral: The Property’s Value

Collateral—the property itself—is a critical consideration for underwriters. The loan-to-value ratio (LTV), determined by an appraisal, plays a key role. Lenders typically cap the LTV at 80% for first mortgages, with mortgage insurance required beyond this threshold. However, alternative options such as piggyback loans offer flexibility in financing.

Related: How to Find the Best Places to Invest in Real Estate

4. Character: Demonstrating Reliability

The next thing that underwriters look at is your character, and they determine that in a few different ways. For example, they want to see that a person has worked at least two years

on their Verification of Employment. Underwriters also like to see that you have lived at your current residence for at least two years. Occasionally, that can have an effect on their decision even if you’re moving to a new home.

Underwriters also consider your age. Age 50 truly is better than age 30. So, for those of you who are in the baby boomer generation and feeling a little older, you actually have a leg up. That doesn’t mean those of you who are 25 and 30 will be overly penalized, but they do take it into consideration.