With increasing average home prices, you may be finding yourself in a situation where you are approved for a home loan but the amount doesn’t quite cover the price of purchasing a home the size you need for your family or for you to live in the neighborhood you desire. Don’t worry, you’re not alone. Below are 6 tips on how you can get approved for a larger mortgage when shopping for your next home.
1. Increase Your Credit Score
One of the biggest factors in how much you can qualify for is your credit score. Your interest rate’s closely tied with this. A high credit score will be your best friend, earning you the privilege of getting a lower mortgage rate. Lower mortgage rates equal higher loan amounts. Of course, this also means that the inverse is true. Bad credit scores will significantly raise your rate and, in turn, ensure your mortgage amount is lower than you would like. Even half a percent makes a huge difference, potentially even thousands of dollars’ worth. So, focus on fixing your credit score and whip it into shape.
2. Reduce Your Debt
Another important factor that determines the amount of money you can borrow for your home loan is your debt-to-income ratio. This debt ratio shows lenders how much of your monthly income goes towards your bills and home much you should have left for your mortgage payment. When you have a low debt-to-income ratio, this shows you are not only more responsible by having less debt but that you also have more of your monthly disposable income available for your mortgage payment.
A fast way to improve your debt to income ratio is to look at your current monthly credit card, auto, and personal loan bills. Try to pay off the debts that have the highest monthly payments, if possible. Also, be aware that lenders will only count those debts which have 10 or fewer payments remaining on the loan. So for example, if you have a car payment of $500 per month but only 11 months remaining on the loan, by making 1 extra payment, you can have that $500 monthly payment excluded which will give your debt-to-income ratio a big boost.
3. Consider Using A Co-Borrower
In some cases, no matter how hard you work to improve your credit and lower your debt, you still don’t have quite enough income to qualify for the home you need. When this is the case, one possible solution is to consider adding a co-borrower.
Once you do, their income will be factored into your approval amount, and can completely turn around the amount offered. Their credit score can also be a significant help should you find yours not entirely up to par. In other words, it can be a total gamechanger.
The ideal co-borrower should have a steady income for at least 2 years and a credit score equal to or better than your current score. It would be best if you still were cautious when going this route, though. Verify that both of you understand the terms and conditions, their legal obligations, and their risk in the event of a default. Remember that you are pulling them into a financial responsibility, and you should treat it as such.
4. Clean Up Your Credit Report
While your credit score goes a long way to scoring you an excellent mortgage loan, your credit report in general also has a lot of sway. Having a clean record signals both trustworthiness and an evident ability to pay/manage your debts, meaning your lenders will offer you that much higher of an amount.
The first step is to do a comprehensive review of your full credit report and make note of any late payments, collections, and judgments. Many times you’ll find errors or outdated items that you can request to be removed. If not, you may still be able to settle with the lender or collection company and eventually have the item removed from your report. Not only will this help your credit score, but it will also make your full report look better in the eyes of the lender.
5. Shop Around for Lenders
In dating, people are quick to remind you that there are other fish in the sea. You would do well to remind yourself of this when you’re trying to get the right mortgage amount. The number of lenders available is much like the number of churches in a Midwest town. There are tons of them! You don’t have to be stuck or wedded to one. Shop around if you’ve received a loan estimate that isn’t what you’re wanting. On average, we recommend getting a quote from at least three to four different companies. Remember: not all lenders are created equal. Fees and rates can vary widely from one to another, as can the approval amount itself. Speak to a few, and you’re sure to find a higher mortgage loan.
6. Find Sources of Additional Income
We know, we know. It’s not quite this straightforward in practice. However, your income is one of the primary determinants behind how big a loan you can pull off. The more cash you’ve got, the higher the payoff for the lender, and the more comfortable they’ll be giving you what you want. If you can find any way to make a little extra cash on the side and bump up your numbers, it can reap big rewards. Some additional sources of income may include:
- Interests from investments
- Rental property income
- Money earned from a side job/business
Remember that you should review your current credit score, full credit report, and your debt-to-income ratio before applying to get pre-approval for your home loan. Focus on improving your credit score, removing blemishes from your credit report, paying down your debts to remove those monthly payments, and find ways to increase your monthly income, if possible. By doing these steps, you’ll be well on your way to getting the home you deserver for you and your family.