Flowchart: Do I Qualify for a Mortgage Loan?

by on May 13, 2013Andy Fulton

The vast majority of Americans use mortgage loans to finance the purchase of their homes. Around 89 percent of the residential real estate transactions in 2011 used some kind of mortgage loan. They allow homebuyers to purchase a far larger, nicer house than they would be able to afford if they had to rely on their savings.

Not all homebuyers qualify for mortgage loans. Banks and other lending institutions will only give potential homebuyers the tens if not hundreds of thousands of dollars they need if the homebuyers can demonstrate their ability to pay the lenders back. Use the flowchart found below to determine if you qualify for a mortgage loan.

A flowchart that will tell homebuyers if they qualify for a mortgage loan


What is your credit score?

Credit scores are perhaps the foremost consideration for banks when determining whether borrowers should receive loans of any kind. This is because credit scores are simple, easy-to-process numerical expressions of borrowers’ creditworthiness; a lender can quickly draw conclusions about how well someone will be able to pay back a loan simply by looking at their credit score.

Any borrower with a credit score well above 640 is considered to have good credit and can reasonably expect to receive a mortgage loan, provided the rest of their finances are also in good shape. Borrowers with credit scores in the neighborhood of 640 may need to demonstrate their ability to make mortgage payments in other ways. Finally, borrowers with credit scores well below 640 should find a co-signer or look for alternate forms of financing.

How long have you been employed?

For most Americans, the ability to repay loans is dependent upon the steady source of income their jobs provide. Lenders are understandably hesitant to issue a mortgage loan to someone with a shoddy employment history; potential borrowers who regularly cycle in and out of work will thus find it difficult to secure a loan.

The borrowers who are most likely to get a mortgage loan are those who have been steadily employed at one or more jobs for many years leading up to their application. Do you not match this description? A strong employment history might not be necessary if your credit score, savings and other finances look strong.

How much of your income will go to the mortgage?

A borrower who would spend most of his income making debt payments will make lenders uneasy. Ideally, a borrower’s mortgage payments will be less than half of his monthly income and easy for him to consistently make.

How much money do you have saved?

It’s important for borrowers to have a high volume of savings. Enough cash reserves must be available to make the down payment, which will ideally be 20 percent or more of the total cost of the house. Lenders will also take an applicant’s savings into consideration because that money may be relied on in the event that the applicant or a spouse loses their job.

Potential borrowers with only a little savings – enough for a 3.5 percent down payment and a small cash cushion – might be able to secure a mortgage loan, depending on what lenders they approach. Borrowers with no savings – those who are unable to make a down payment and lack a cushion of cash to fall back on – can count on not receiving a loan.

What will your debt-to-income ratio be with a mortgage?

Before you apply for a mortgage loan, divide your monthly debt by your monthly income. In this case, “debt” is defined as recurring debt payments like credit card, car loan, student loan and child support payments.

If the resulting percentage (your debt-to-income ratio) is below or around 36 percent, it’s likely that lenders will be willing to give you a loan. Lenders will not be as interested in loaning you money if your debt-to-income ratio is significantly higher than 36 percent.

Are you a U.S. citizen or do you have resident alien status?

There are no restrictions on non-citizens purchasing and owning real estate in the U.S., but it’s next to impossible for non-citizens to secure mortgage loans from an American lender. So, unless foreign buyers are planning on paying exclusively with cash or financing their real estate purchases with loans made in their home countries (something that most banks will not do), buying U.S. homes is unattainable.

Quick disclaimer about this flowchart:

Please note that the information found in this flowchart and blog post might not apply to home loans overseen and insured by lenders like the U.S. Department of Veterans Affairs (VA), Federal Housing Finance Agency (FHFA) and the U.S. Department of Housing and Urban Development (HUD). For example, it’s possible for servicemen and women to acquire a VA home loan with no down payment whatsoever.

This flowchart is a companion to the “Am I Ready to Buy A House?” flowchart. Please check it out and feel free to share it on your site using the embed code found on the blog post!

{ 9 comments… read them below or add one }

Tim March 20, 2014 at 9:17 am

I have to agree with Brad as well. There are always going to be niche portfolio loan programs to accommodate certain groups of borrowers. There are a couple of products where debt ratios allowed are 50% and 55%.

To the author’s original point of 89% of transaction being financed n 2011. Yes, I hope we get back there because 2013 was an anomaly where people simply paid cash for homes and this was not just investors paying $50k, it was higher end homes too. As the low end deals have all but dissipated, we will get back to normal and it is less of a seller’s market.

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jonathan caguioa August 9, 2013 at 11:14 pm

nice one

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Pensacola Real Estate July 13, 2013 at 8:25 pm

I thought the flow chart was amazing; however, I think it’s more amazing you give me the html snippet to include it in my blog. Thank you!

How do I subscribe to this blog?

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Jerald Schragen June 24, 2013 at 10:02 am

available to answer questions.

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Ophelia Pressley July 9, 2013 at 12:43 pm

I have a house that was left to me from my mother, the house is paid for. I only pay the taxes on this property. I would like to make a loan to do some up grades on the house. My credit score is under 640. I need a loan of about $8,000.00. To put a heating system in the house and minor problem with the bathroom and a new stove.

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Alan Lundahl July 11, 2013 at 8:07 pm

Don’t take out any loans on the house. Leave it paid for. Don’t use credit. Save the money and pay cash, or nurse the heating system.

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Brad Yzermans May 14, 2013 at 10:16 am

There are two thing son here that I would disagree with.

1. Having a DTI ratio over 36% will not prevent a borrower from qualifying. A household can comfortably afford a mortgage with a DTI ratio up to 45%, or even higher.

2. Down Payment Saved up. There are several loan programs that allow a borrower to buy a home with little to $0 down payment. In fact, the USDA loan has a lower payment even when they have no down payment than compared to using an FHA loan with 3.5% down payment.

I also offer my borrowers down payment assistance which means they need only .5% down payment.

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Kathy May 20, 2013 at 10:07 am

Hi Brad,

Maybe you can give me some insite. We’ve owned our townhouse for the last 8 1/2 years. We would like to purchase a bigger home, our family has outgrown our current home. Can’t sell the townhouse because of the current market so looking at renting it out. I’m sure that we can find a renter for our townhouse fairly quickly. Our problem is, we don’t have much of a downpayment. In our case how much of a downpayment would be need to purchase a new home while renting out the townhouse? What type of qualifiers are the lenders looking for in a situation like ours. Thanks!

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Gustavo June 15, 2013 at 11:34 am

Where can we find you Brad…?

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