How do you qualify for a mortgage?
No, the Central Intelligence Agency is not involved, but banks will review your Credit, Income, and Assets. No one factor is determinative, rather the entire financial profile, as well as the condition of the building, is taken into account in determining whether a buyer qualifies for a mortgage and/or what type of loan program is available to him or her.
Credit: It goes without saying that bankruptcy or foreclosures will make it very difficult to obtain financing. Other credit snafus will also negatively impact financing such as carrying a high percentage of debt or having a history of delinquencies. What is a good credit score is changes with the times... above 700 used to be considered excellent, but now many consider that benchmark to be 740. In any event, the importance of good or excellent credit cannot be overstated.
Income: Income is the denominator that can limit the amount of financing. Banks consider an applicant's debt-to-income ratio in determining how much debt they can take on through financing. Debt-to-income ratio is the measure of total debt obligations (the monthly carrying costs of the purchase including mortgage and monthly maintenance/common charges and taxes on the property along with any other mortgages, student loans, outstanding credit card debt) divided by verifiable income. Debt is pretty easy to calculate though it varies from property to property that the buyer is considering. Verifiable income is easy if the applicant(s) have a salaried job, but can be much trickier with self-employed applicant(s). In fact, each bank might have different standards for determining income in these trickier cases, so an applicant's ratio may vary between different lenders. Different lenders and programs vary in the ratio they require: In most cases, on jumbo loans (loans over $625,500), banks will want ratio of 43% or below, but some use expanded criteria and will lend a higher amount. Loans under $625,500 can be obtained with a debt-to-income ratio of up to even 50 percent. There's no magic number, so it's important to consult with your mortgage professional when considering different properties.
Assets: Most banks will want to see some post-closing reserves (mortgage + monthly carrying costs) -- this could be a year's worth, or or 2 months', or 6 months' worth. Some programs may accept retirement assets toward reserves, while other lenders may require the reserves to be liquid to qualify for their lowest rates.
What does all of this mean? There are a huge number of lenders and even more loan programs out there, and even if you are not an ideal candidate, there will likely be a right program out there for you. If one factor is lacking (like income), banks will place greater emphasis on the other factors. It's all a sliding scale, and different lenders and loan programs require different benchmarks. There might even be special circumstances that would justify a loan where the lender's standard analysis would normally result in a rejection (like for example, if you held a great deal of assets in the bank or getting a co-signer).
Finally, a disclaimer: I'm no mortgage expert, but I know a few. An experienced mortgage banker is the best (really, only) person to advise you properly on your specific financing options, and they should be on speed dial as soon as you decide to you want to buy a home. Once they review your mortgage application, run your credit, and verify the information via the underlying financial documents, such as tax returns, paystubs, bank/brokerage/retirement plan statements, canceled rent checks, any other proof of assets or explanation for recent large deposits, they will be able to advise you on how to finance your home.