The New Standards for Mortgage Loan Approval

By Stock Research Pro • May 14th, 2009

With the recent, widely reported, problems in the subprime mortgage market, lenders have developed more stringent standards when considering mortgage loan applications. While people who can demonstrate good credit history are not being dramatically impacted, borrowers with flawed credit are being more closely scrutinized, especially now that the lender cannot count on rising home values as collateral for their loans.

People who have become tired of renting and are ready for home ownership should take the time to become familiar with the characteristics lenders are now looking for in borrowers. An understanding of these requirements is of primary importance in securing the funding for a home.


Criteria for Mortgage Loan Approval

Credit History: Credit scoring, which has been used for quite some time in other consumer lending areas, is now being used by many mortgage companies as part of their evaluation. A credit score above 720 will earn most borrowers the most favorable interest rate currently available. As scores slide lower down the scale, less favorable rates are offered. Scoring below 620 can put the borrower into the “subprime” category. These borrowers will have a difficult time securing a loan. Those who do, will pay a higher rate than borrowers with better scores.

Loan to Value Ratio: Lenders want to know how much money you are able to put down toward the purchase of the home in order to calculate the loan-to-value (LTV) ratio. To perform this calculation, the lender will divide the amount you need to borrow by the value of the home you are looking to purchase. Ideally, the LTV ratio will be 80% or less. Please note that the lender may need proof as to the availability of these funds.

Minimal Debt: The lender may need to calculate your personal debt-to-income ratio in order to verify that your new mortgage combined with your other monthly personal debt does not exceed a certain percentage of your gross monthly income- 36% or less is often what they are looking for.

Other Important Criteria Lenders Look For


Employment Stability: Generally two years or more with the same employer or, at a minimum, in the same field of work

Income Stability: They will want to see proof of at least two years of stable income

Availability of Assets: Many lenders now ask for proof of availability to cover at least two months of mortgage payments


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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