Lenders decide how creditworthy you are by weighing five things together: your credit history and score, the stability of your income, how much debt you already carry, any collateral you can pledge, and the terms of the loan you’re asking for. Your FICO score, a number between 300 and 850, is usually the first filter, but approval turns on how all these pieces fit.1myFICO. How Are FICO Scores Calculated Federal law sets rules for how lenders can gather and use your financial information, and it gives you specific rights if you’re turned down.
Your Credit Score and What Builds It
A FICO score compresses years of borrowing behavior into a single number, with higher scores signaling lower risk.2FICO. The Perfect Credit Score: Understanding the 850 FICO Score Five categories drive it, each weighted differently:1myFICO. How Are FICO Scores Calculated
- Payment history, 35 percent. Whether you’ve paid on time is the biggest single factor. Late payments, collections, and other negative marks pull this down.
- Amounts owed, 30 percent. This measures how much of your available credit you’re using. Balances close to your limits look risky.
- Length of credit history, 15 percent. The age of your oldest account, your newest, and the average across all of them. Closing an old card you no longer use can shorten that average and cost you points.3myFICO. How Credit History Length Affects Your FICO Score
- New credit, 10 percent. Opening several accounts in a short window looks risky, especially without a long history behind you.
- Credit mix, 10 percent. Handling a card, an auto loan, and a mortgage shows you can manage different repayment structures.
Credit bureaus compile the underlying data into reports that generally carry most negative items, like late payments and collections, for seven years.4Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports The Fair Credit Reporting Act governs how that information is collected, shared, and corrected.
Income and Employment
A strong score shows you’ve handled past debt. Lenders also want proof that you earn enough to handle the new payment. Most programs ask for at least two years of employment and income documentation.5Department of Housing and Urban Development (HUD). Section B – Documentation Requirements Overview, HUD 4155.1 For salaried workers, that usually means recent pay stubs and two years of W-2s. A lender may also verify earnings directly with the IRS by having you sign Form 4506-C, which releases your tax transcripts.6Internal Revenue Service. Income Verification Express Service (IVES)
Self-Employed or Freelance Income
If you’re self-employed or work on contract, the paperwork is heavier. Fannie Mae generally requires two years of signed personal and business federal tax returns with all schedules, so the lender can see a pattern in gross income, expenses, and taxable income. If your business has been running at least five years and you’ve held a 25 percent or greater ownership stake that whole time, one year of returns may be enough. Borrowers with less than two years of self-employment can still qualify if the most recent return covers a full 12 months of income from the current business and their prior work supports the current earning level.7Fannie Mae. Underwriting Factors and Documentation for a Self-Employed Borrower
What Lenders Can’t Consider
The Equal Credit Opportunity Act bars lenders from using race, color, religion, national origin, sex, marital status, or age in the approval decision.8Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition A lender also cannot reject you because your income comes from a public assistance program or because you’ve exercised rights under consumer protection laws. The evaluation has to focus on the reliability of the income itself, not its source.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI) measures how much of your monthly gross income is already committed. Lenders look at it two ways. The front-end ratio counts only housing costs: the proposed mortgage payment plus property taxes and insurance. The back-end ratio adds everything else, including student loans, car payments, and minimum credit card payments.
There is no single universal DTI cap. For conventional loans sold to Fannie Mae, manually underwritten applications face a back-end DTI ceiling of 36 percent, which can stretch to 45 percent with strong credit scores and cash reserves. Applications run through Fannie Mae’s automated underwriting system can be approved with back-end DTI as high as 50 percent.9Fannie Mae. Debt-to-Income Ratios FHA and VA loans use their own thresholds.
The Student Loan Wrinkle
Student loans get special treatment because many borrowers are in deferment or on income-driven plans that show a $0 payment on their credit reports. For FHA loans, when the credit report shows a zero payment, the lender must instead use 0.5 percent of the outstanding balance as the assumed monthly obligation.10Department of Housing and Urban Development (HUD). Mortgagee Letter 2021-13 – Student Loan Payment Calculation of Monthly Obligation On a $40,000 balance, that puts $200 a month against your DTI even if you’re currently paying nothing. If the credit report shows an actual payment above zero, the lender uses that figure.
Collateral and Loan-to-Value
For a secured loan, the pledged property is the lender’s safety net. The key measure is the loan-to-value ratio (LTV), which compares the loan amount to the appraised value of the collateral. A 20 percent down payment on a home produces an 80 percent LTV, meaning the lender is financing 80 cents of every dollar of the home’s value.11Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages
That 80 percent threshold matters for another reason. Conventional loans above 80 percent LTV generally require private mortgage insurance (PMI), an added monthly cost that protects the lender, not you, if you default. Some programs allow LTVs as high as 97 percent for first-time buyers, at the cost of PMI and often a higher interest rate.12FDIC. Fannie Mae Standard 97 Percent Loan-to-Value Mortgage Federal law requires the lender to clearly disclose that it’s taking a security interest in the property you’re pledging.13Office of the Law Revision Counsel. 15 USC 1638 – Transactions Other Than Under an Open End Credit Plan Lenders also weigh how easily the asset could be sold if you default. Real estate in a stable market is treated more favorably than a vehicle, which loses value the moment you drive it off the lot.
Loan Terms, Purpose, and Down Payment
The structure of the loan itself shifts the risk. A 15-year mortgage exposes the lender to less interest-rate risk than a 30-year mortgage, which is why shorter terms usually come with lower rates and significantly lower total interest.14Freddie Mac. 15-Year vs 30-Year Term Mortgage Calculator Purpose matters too. A lender views funds going to home improvements or debt consolidation differently than money for discretionary spending.
Down payment size feeds directly into pricing through loan-level price adjustments (LLPAs), surcharges that raise your interest rate based on your LTV and credit score combined. For a purchase loan with a term longer than 15 years, a borrower with a score of 780 or higher pays no LLPA when LTV is at or below 70 percent, but the surcharge climbs to 0.375 percent once LTV crosses 75 percent. A borrower with a score below 640 starts absorbing surcharges at much lower LTVs. Investment properties carry the steepest adjustments, up to 4.125 percent at higher LTVs.15Fannie Mae. Loan-Level Price Adjustment Matrix
If You Have Little Credit History
If you have a thin file or no traditional credit history, some lenders and scoring models now look at non-traditional data. Rent payment reporting services can submit your payment record to one or more of the three major bureaus, and for borrowers who are otherwise credit invisible, even a short run of on-time rent payments can meaningfully lift a score. This is still an evolving area, and not every lender or model weights rent and utility data as heavily as traditional credit accounts.
Your Rights in the Process
Federal law gives you protections at every stage, and using them can help you catch errors and strengthen the next application.
Free Credit Reports
You’re entitled to one free credit report every 12 months from each of the three nationwide bureaus, Equifax, Experian, and TransUnion, through AnnualCreditReport.com.16Office of the Law Revision Counsel. 15 USC 1681j – Charges for Certain Disclosures Pulling them before you apply is the cleanest way to spot errors or forgotten debts.
If You’re Denied
When a lender turns you down, the Equal Credit Opportunity Act requires notice of the decision within 30 days of a completed application, with the specific reasons stated. Vague responses like “insufficient credit” don’t satisfy the requirement.8Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition Once you receive an adverse action notice, you have 60 days to request a free copy of the credit report the lender relied on, directly from the bureau that supplied it.17Federal Trade Commission. Fair Credit Reporting Act That’s in addition to your annual free report.
Disputing Errors
If you find inaccurate or incomplete information on a report, the Fair Credit Reporting Act lets you file a dispute with the bureau. Once notified, the bureau has to investigate and respond, typically within 30 days. If the disputed item can’t be verified, it must be corrected or removed. Credit report errors are common enough that checking your reports before any major loan application is one of the most effective steps you can take to protect the way a lender sees you.