5 Ways to Increase Your Chances of Getting a Mortgage
Purchasing a home is likely to be your largest single financial investment, and if you’re like most people, you’ll need a mortgage to make it happen. While there are no promises that you will be approved for the mortgage you desire, there are several steps you may take to make yourself more appealing to lenders. Continue reading to learn the greatest strategies for increasing your chances.
1. Verify What’s On Your Credit Report
As part of the lending process, lenders look at your credit history to see if you qualify for a loan and at what interest rate. All three of the “big three” credit rating organizations – Equifax, Experian, and TransUnion — must provide you with one free credit report per year as required by law. Obtaining a credit report every four months (rather than all at once) will allow you to maintain a watch on your credit report throughout the year by staggering requests.
2. Correct any errors
Do not assume what’s on your rating is reported with accuracy once you have received it. Take a thorough look at your credit report to determine if there are any errors that might have a negative impact. Some things to be aware of:
- The debts that have previously been paid off (or discharged)
- When a creditor mistakenly believes that you are someone else because of similar names and/or addresses, or a wrong Social Security number, for example.
- Appears as a result of identity theft
- Ex-spouse information that shouldn’t be on your report anymore
- Insufficient or outdated data
- inaccuracies in the recording of closed accounts (Notated as the creditor closing the account, when you were actually the one to close it.)
3. Boost your credit rating
A credit rating or credit score is the single number that lenders use to evaluate your credit risk and determine how likely you are to make timely payments to repay a loan. A credit report summarizes your history of paying debts and other bills. A credit score is a single number that lenders use to evaluate your credit risk and determine how likely you are to make timely payments to repay a loan. The FICO score, which is generated from various pieces of credit data in your credit report, is the most popular credit score:
- History of payments – 35%
- Due Amounts – 30%
- Credit history length – 15%
- Credit Diversity – 10%
- New Credit Accounts – 10%
Because the better your credit score is, the lower your mortgage rate will be. Set up payment reminders to make sure you pay all of your bills on time, keep your credit card and revolving credit balances low and reduce the amount of debt you have (for example, stop using your credit cards).
4. Reduce Your Debt-to-income Ratio
With a debt-to-income ratio, you compare your total debt to your total income. Calculated by multiplying your monthly gross income by the entire amount of recurrent debt you owe on a monthly basis. Lenders assess your debt-to-income ratio to estimate how much house you can buy, as well as your capacity to handle your monthly payments.
You have a healthy balance between debt and income if your debt-to-income ratio is low. It is preferred by lenders that borrowers have a debt-to-income ratio of 36 percent or less, with no more than 28 percent of the debt going toward mortgage payments (this is dubbed the “front-end ratio”). A debt-to-income ratio of 43 percent is usually the maximum you may have and still qualify for a mortgage. 3 If your monthly expenses are too high, most lenders will decline the loan.
Reduce your debt-to-income ratio by doing one of two things, neither of which is easy to do:
- Your monthly debt should be reduced.
- Boost your monthly gross revenue.
If you want to decrease your monthly recurring debt, the most crucial thing you can do is buy less. Analyze where your money is going each month, identify areas where you can save, then take action.
Increasing your income is not simple, but you may attempt to locate a second job, work longer hours at your current job, take on additional responsibilities at work (and obtain a pay raise), or finish coursework/licensing to improve your abilities, marketability, and earnings. For married couples, another option is for your spouse to take on more work or to return to the workforce if one of you was a stay-at-home parent previously.
5. Make a large down payment
Something as simple as a large down payment tells a lender that you know how to save well. Increase your chances of receiving the mortgage you want by putting down a substantial down payment that lowers your loan-to-value ratio. Divide the mortgage amount by the home’s purchase price to get the loan-to-value ratio (unless the home appraises for less than you plan to pay, in which case the appraised value is used). An example will help you better understand what I mean. Let’s say you want to buy a $100,000 house. 20% of the purchase price is paid upfront, so you apply for an $80,000 mortgage with a 20% down payment of $20,000. 80% loan-to-value ($80,000 mortgage divided by $100,000, which equals 0.8 or 80%).
For the same property, if you put down $40,000, your loan-to-value ratio would drop to 60%. As a result, the loan-to-value ratio would drop to 60%, making it simpler to qualify for the smaller loan. Greater down payments and lower loan-to-value ratios not only increase your chances of receiving a mortgage but also lower interest rates and fewer monthly payments over the life of the loan.
Remember that a 20 percent or higher down payment means you won’t have to pay mortgage insurance, which can save you money.
The Final Verdict
Mortgages have become increasingly difficult to get because of tighter lending regulations. If you start early enough, you might increase your chances of qualifying for a loan. Start by verifying your credit record and correcting any errors, then concentrate on increasing your credit score, decreasing your debt-to-income ratio, and aggressively saving for your down payment.