5 Things Banks Look for in Mortgage Borrowers

For many Americans, owning their own home is a big part of fulfilling the American Dream. However, when they’re ready to buy a house, most people need a mortgage loan to facilitate the purchase. Before they receive the loan, the bank they plan to receive it from examines their loan qualifications closely.

Key takeaways

1. Paying down debt and cleaning up your credit score before applying could save you thousands of dollars over the course of your mortgage.
2. Having a high net worth and liquid assets helps, but how high it needs to be depends on how much you want to borrow.
3. Ultimately, what banks are looking for are signs that a borrower will be willing and able to repay their loans.

What Are the Top Factors Mortgage Lenders Consider?

What positive characteristics do banks look for when reviewing mortgage borrowers’ qualifications? The answer ultimately depends on the lender, but there are five things that every bank likes to see: excellent credit history, low debt-to-income ratio, high net worth, a high degree of liquidity, and a good loan repayment history. Let’s look at the importance of each one.

1. Excellent Credit History

According to lendingtree.com, “most lenders require a 740 credit score or higher to qualify for the lowest mortgage interest rates, so anything above 740 is considered a very good score to buy a house.” But how low can you go without being disqualified for a mortgage? At most banks, a credit score of roughly 620 is the cut-off point. Because your credit score has a major impact on the loan interest rate you receive, cleaning up your credit report could save you thousands of dollars during the loan payment period.

2. Low Debt-to-Income Ratio

This qualification is all about math. Most banks consider a low debt-to-income ratio to be monthly debt payments that require less than 36% of your monthly net income.

To give a basic example, if you bring home $10k per month, but half of that amount is put toward loans, you’re not in the best position to receive a mortgage, even though you would be considered a high wage earner. This is why it’s advisable for potential mortgage borrowers to pay down debt before you establish the interest rate for your home loan.

3. High Net Worth

Having a high net worth helps you receive favorable loan terms. In the eyes of a lender, high net worth means you would presumably pay for the home with some of that worth, if you experienced a financial setback that disrupted your monthly payment plan.

According to Investopedia, “the most commonly quoted figure for membership in the high net worth club is $1 million in liquid financial assets.” However, to a lender, the status of a mortgage borrower’s net worth is evaluated partly in relation to the loan amount. Depending on the property’s price, you don’t have to be a millionaire for your net worth to work in your favor.

4. High Degree of Liquidity

Investopedia notes in the quote above that liquidity is a key factor concerning your loan qualifications based on wealth. Banks like to see a high degree of liquidity among your assets because it ostensibly means that liquid assets can be used quickly to help satisfy loan payments if the need arises.

For example, to a financial lender, you look better on paper if you have $400k in certificates of deposit (CDs) than if you own a crop farm that’s worth the same amount of money. This is why some people liquidate assets before they pursue owning the home of their dreams by applying for a long-term mortgage.

5. Good Loan Repayment History

Having a history of making loan payments punctually will help you when it comes to loan qualification. None of your previous loans may be as large as your prospective mortgage loan, but having paid them on time shows your lender that you’ll take the same approach with a home loan. A bank typically earns much more from a mortgage that’s paid on time than it does from liquidating a property through foreclosure due to non-payment.

Does a mortgage count against net worth?

Yes, a mortgage does count against your net worth. When you’re calculating net worth, you’re essentially adding up all your assets (things you own, like your house, car, savings, investments) and then subtracting your liabilities (debts, including your mortgage, car loans, credit card debt, etc.). 

So, if you have a home valued at $300,000 and a mortgage of $200,000, the mortgage reduces the value of your home asset in your net worth calculation. In this example, instead of adding the full $300,000 value of the home to your net worth, you’d only add $100,000, reflecting the home’s value after accounting for the mortgage debt. Your net worth gives you a snapshot of your financial health by showing the difference between what you own and what you owe.

Conclusion

If you don’t have the characteristics above, it doesn’t mean you can’t be a mortgage borrower. But it almost certainly means the mortgage will have less than optimal terms. If you’re ready to own a home, but don’t have the qualifications to receive the best financing, pursuing a seller financed mortgage may be a good alternative. To learn more about seller financing, visit the Owner Financing Tips page on our website today.

Cited article sources

1. Investopedia (Updated July 09, 2022): “High-Net-Worth Individual (HNWI): Criteria and Example. https://www.investopedia.com/terms/h/hnwi.asp
2. Credit scores needed to get a mortgage
   https://www.lendingtree.com/home/mortgage/credit-score-needed-buy-house/