Income, debt, and your anticipated mortgage payments are the primary factors that affect whether you qualify for a loan. To determine your qualifications, the first thing a mortgage lender usually does is to divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio, or the amount of your monthly housings costs as a percentage of your gross income.

If the resulting percentage falls within a certain limit, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio, or the amount of your monthly debt costs as a percentage of your gross income. Again, if the ratio falls within prescribed limits, the lender will most likely qualify you for the loan.

The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV).

LTV shows your equity in the property. As discussed in the section entitled "The Home Buying Process," your equity is basically the amount of the property you own, expressed as a monetary figure. Your LTV and equity are crucial because some lenders believe that the higher the LTV (and the lower the equity), the higher the risk of a borrower defaulting on his or her loan. Thus, loans to borrowers with high LTV ratios may present lenders with greater risk, prompting them to increase their costs.