Before you begin looking for a home or a mortgage, it’s important to know what is involved in the mortgage approval process. Lenders need to have something tangible to back their loans given to borrowers should they default on the mortgage. Most lenders will require you to make a down payment on the home you wish to buy. The down payment can range from 5% to 20% of the price of the home. FHA loans, veterans’ loans, and Rural Hosing Service loans require smaller down payments or no down payments. The more you put down, the less interest you’ll pay over the term of your mortgage.

The other collateral your lender will look at is the home itself. The lender will order an appraisal of the home, which will show how much the home is worth relative to other homes in the area. Typically, a lender will not do a mortgage for more that 95% of the appraised value of the home.

Lenders also need to know that you can make your mortgage payments in full and on time. So they’ll look at your income, savings, and your debt. Lenders will usually limit the full amount of your monthly mortgage payment, including taxes and insurance, to 25% to 28% of your monthly pre-tax income.

The lenders will also look at your debts such as car loans, student loans, other mortgage debt and any other financial obligation that you have. Typically, lenders prefer that all of your debt, including your mortgage payment, not consume more than 33% to 36% of your monthly gross income. FHA loans have a higher debt percentage of 41% of your monthly gross income.

The other factor in the mortgage approval process is your credit history. The lender will look at your credit score, any history of defaults or foreclosures, and any history of late payments on all types of credit accounts.

It is to your advantage to look at your credit history before beginning the mortgage approval process. If your lender turns you down for a mortgage, the lender must explain why. If this occurs, you have the right to request in writing the reason for the denial