It's essential to consider how much you can afford to pay before you look for a house. Considering affordability early on will save you time and money because you won't bid on unattainable houses or apply for loans that are out of your ballpark. It will be easier to get a loan and, if necessary, you'll be able to take creative steps toward improving your financial and credit profile. Good lending institutions are very careful with their depositors' funds. They employ professional underwriters, who evaluate the degree of risk involved in loans that the lenders have been asked to make by prospective borrowers. Underwriters tell the lender how much risk is involved in lending money to you. If they determine that you're too risky, chances are you won't get the loan. Underwriting standards vary considerably from lender to lender. Lenders constantly fine-tune the way they evaluate mortgage applications in search of better screening techniques to keep borrowers - and themselves - out of foreclosure.

Lenders traditionally rely on 2 factors to assess prospective borrowers' creditworthiness. They are the ability of a borrower to repay their loan, and their willingness to pay. Lenders must find out what the house you want to mortgage is currently worth, because the property will be used to secure your loan. They do this by getting an appraisal, a written report prepared by an appraiser (the person who evaluates property for lenders) that contains an estimate or opinion of fair market value. The reliability of an appraisal depends upon the competence and integrity of the appraiser. A loan-to-value ratio, or LTV, is a quick way for lenders to guesstimate how risky a mortgage might be. LTV is simply the loan amount divided by the property's appraised value. If you're borrowing $150,000 to buy a home with an appraised value of $200,000, the loan-to-value ratio is 75 percent (your $150,000 loan divided by the $200,000 appraised value). The more cash you put down, the lower your loan-to-value ratio and, from a lender's perspective, the lower the odds that you'll default on your loan. It stands to reason that you're less likely to default on a mortgage if you have a lot of money invested in your property.

Conversely, the higher the LTV, the greater a lender's risk if problems arise later with your loan. That's why most lenders charge higher interest rates and loan fees or require mortgage insurance whenever a loan-to-value ratio exceeds 80 percent of appraised value.