The Five Core Factors Lenders Evaluate
When you apply for a home loan, a lender's goal is straightforward: they want to assess how likely you are to repay the debt. To do that, they examine a consistent set of financial factors — sometimes called the "Five C's of Credit." Understanding each one before you apply can help you identify strengths to highlight and gaps to address.
| Minimum credit score (conventional loan) | Typically 620 or higher (Varies by lender and loan program) |
| Maximum DTI guideline | 43% for most conventional loans (Some programs allow higher with compensating factors) |
| Employment history reviewed | 2 years standard (Additional documentation may apply for self-employed borrowers) |
| PMI typically required below | 20% down payment (conventional) (Rules differ for FHA, VA, and USDA loans) |
| LTV threshold affecting loan terms | 80% or lower often preferred (Higher LTV may trigger PMI or stricter requirements) |
Credit Score
Your credit score is one of the first numbers a lender checks. It summarizes your borrowing history into a single three-digit figure, typically on a scale of 300–850. Higher scores generally signal lower risk to a lender and can influence both loan approval and the interest rate you're offered. Conventional loans commonly require a minimum score around 620, while government-backed programs may have different thresholds. Check your credit reports for errors before applying — a mistake on your report can drag your score down unfairly.
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio — the percentage of your gross monthly income that goes toward debt payments — is a central metric lenders use to judge affordability. Most lenders look for a DTI at or below 43%, though some programs allow higher ratios with compensating factors. To estimate yours, add up all monthly debt obligations (car payments, student loans, credit cards, and the proposed new mortgage) and divide by your gross monthly income. See our tips for reducing household debt if your DTI is higher than you'd like.
Employment and Income History
Lenders want evidence that your income is stable and likely to continue. They typically review two years of employment history, W-2s, and recent pay stubs. Self-employed borrowers usually need two years of federal tax returns and may face additional scrutiny around income consistency. Changing jobs during the application process can complicate approval — our article on common first mortgage pitfalls covers this and other timing mistakes to avoid.
Assets, Down Payment, and the Property Itself
Assets and Reserves
Lenders review your bank and investment account statements to confirm you have enough funds for the down payment, closing costs, and ideally a few months of mortgage payments held in reserve. These reserves reassure lenders that a short-term financial disruption — a medical bill, a job gap — won't immediately put your mortgage at risk.
Credit Score
A three-digit number, typically ranging from 300–850, that summarizes a borrower's credit history and indicates how reliably they have managed debt. Higher scores generally reflect lower risk in a lender's eyes.
Debt-to-Income Ratio (DTI)
The percentage of a borrower's gross monthly income that goes toward paying debts, including the proposed mortgage. Lenders use DTI to evaluate whether a borrower can comfortably manage new loan payments.
Loan-to-Value Ratio (LTV)
The ratio of the mortgage loan amount to the appraised value of the property, expressed as a percentage. A lower LTV typically means less risk for the lender and can affect loan terms.
Private Mortgage Insurance (PMI)
Insurance that conventional lenders typically require when a borrower puts down less than 20% of the home's purchase price. PMI protects the lender — not the borrower — if the borrower defaults on the loan.
Appraisal
An independent professional assessment of a property's market value, ordered by the lender during the mortgage process. The appraised value determines the maximum loan amount the lender will approve against that property.
Reserves
Cash or liquid assets a borrower holds after covering the down payment and closing costs. Lenders often look for reserves equal to several months of mortgage payments as a financial safety cushion.
Down Payment and Loan-to-Value Ratio
The size of your down payment affects your loan-to-value (LTV) ratio — the loan amount divided by the home's appraised value. A lower LTV generally means less risk for the lender. Putting down less than 20% on a conventional loan typically triggers a requirement for private mortgage insurance (PMI), which protects the lender if you default. For FHA, VA, and USDA loans, down payment requirements and mortgage insurance rules differ. Our mortgage myths article explains why 20% down is often misunderstood as a hard requirement.
The Property Appraisal
Lenders don't just evaluate you — they evaluate the property. An independent appraiser determines the home's market value; if it comes in lower than the purchase price, the lender will typically only finance up to the appraised value. This protects both parties from overpaying for a home relative to its actual worth.
Once you understand these factors, you can begin gathering the documents you'll need. Our pre-application checklist walks through exactly what to prepare. And if any of the terminology above is unfamiliar, the Mortgage Glossary Every First-Time Buyer Needs offers plain-English definitions for terms like APR, escrow, and amortization.
This article is for general informational and educational purposes only and does not constitute personalized financial, mortgage, or legal advice. Lending criteria vary by lender, loan program, and individual circumstances. Consult a licensed mortgage professional or financial adviser for guidance tailored to your situation.
