How does a lender decide to approve a home loan?

Feb 15, 2017

To approve or not approve...Decisions as to which loans lenders decide to fund can seem a little mysterious, and often leaves applicants feeling somewhat helpless. That’s why we wanted to shed some light on what happens AFTER you submit that loan application. (Please note: the approval process varies greatly by lending institution, but there are a few industry standards, like the ones listed below that a lender consider when deciding which loans to approve.)

  1. Your current, or reasonably expected, income or assets;
  2. Your current employment status;
  3. Your estimated monthly payment on the mortgage;
  4. Your monthly payment on any other loans;
  5. Your estimated monthly payment for obligations related to owning the mortgage and house;
  6. Your current loans – student, car, credit card, etc.;
  7. Your monthly debt-to-income ratio;
  8. Your credit history.

To understand your financial habits, lenders will pull your credit report from all three major credit-reporting bureaus for each borrower. They’ll look for any major prior events, like bankruptcies, collections, and foreclosures, as well your payment history on your credit accounts. Typically lenders will review two years of credit history for each borrower.

Photo of a mortgage lender and loan applicants

What documentation will I need to provide?

Again, this varies greatly by lender. But in general, here are some documents that you may be expected to submit:

  • Prior two years’ W2 forms;
  • Most recent full month’s paystubs;
  • Prior two years’ tax returns;
  • Year-to-date profit and loss statement (if applicable);
  • Prior two months’ worth of financial statements (checking, saving);
  • Source of down payment.

If you’re thinking about buying or selling your home, we’re here to help. We’ve been specializing in helping people achieve their home ownership dreams for over 100 years. To find out more, contact one of our neighborhood branch managers or call us at 800-324-9375.