3 things really: Income, Credit and Appraisal

Income: Banks wants to make sure you can afford the monthly payment and they do this by verifying your income. Back in like 2005, you could get what was called a NINJA (No Income, No Job, or Assets) loan. The name sounds pretty cool until you realize that they caused a deep economic recession in the U.S. and across most of the world a couple of years later. These days, banks will call your employer, look at your W2s and tax returns, plus look in your bank account to make sure that you are getting paid what you say you are. A good rule of thumb that many banks follow (and what financial advisors will tell you) is to not buy a house priced at more than 3 times your annual income. In some markets banks will go higher, but they aren’t going to be giving a $350,000 mortgage to someone making $25k/year.

Credit: Along with being able to afford the monthly payment, banks also want to make sure you are responsible enough to pay your bills on time, and they want to see what other debt you have. This is where your credit comes into play. Often, it can be boiled down to a score (if you’re curious about yours you can find it here) and anything below a certain baseline will be outright declined. The actual number between approved and declined varies depending on the type of loan but usually anything over 720 and you’d be fine, anything below about 660 and you might have to get a specialty loan. The better your credit, the lower your interest rate will usually be as well.

Appraisal: The house you buy has to appraise for a certain amount of money, mainly so the bank can make themselves whole if you decide making mortgage payments isn’t for you. As long as the appraisal (the bank will send out their own appraiser) comes back over, at, or slightly under the selling price, you shouldn’t have an issue. If the house appraises for 10% lower than what you’re trying to get a loan for, they probably won’t give you the amount required to buy the house.