Buying a home is an exciting milestone, but also probably the largest financial investment you’ll ever make. And if you’re like most people, and aren’t a cash buyer, you’ll need a mortgage to make it happen. However, tighter lending practices have been making it challenging to secure a mortgage. The good news is that there are certain steps you can take to make yourself a more attractive borrower in the eyes of lenders. Keep reading to learn about ways to boost your chances of getting a mortgage!
What we’ll cover:
- Review your credit report
- Fix any credit report mistakes
- Build and maintain a good credit score
- Keep debts low
- Ensure Your Income is Provable
- Go large with your down payment
- Compare mortgage lenders
Review Your Credit Report
Lenders will review your credit report (a detailed report of your credit history) to determine whether you qualify for a mortgage and at what interest rates. Legally, you’re entitled to one free credit report from each of the three credit rating bureaus (Experian, Equifax, and TransUnion) every year. If you can stagger your requests you can receive your credit report once every four months – instead of all at the same time- so you can keep an eye on your report throughout the year.
Fix Credit Report Mistakes
Once you get your credit report, don’t assume that everything is accurate. In fact, over 34% of homebuyers will find errors in their credit reports. So, take a closer look at the report to see if there are any errors that could negatively affect your credit score. A few aspects you can watch out for include:
- Debts that have already been paid or discharged
- Information that’s not yours due to identity theft or a mistake, for instance, the creditor confused you with someone else with a similar name or address
- Out-of-date or incorrect information, for instance, incorrect Social Security number
- Information from a former spouse that shouldn’t be there anymore
- Incorrect notations for closed accounts
Build and Maintain a Good Credit Score
A credit score is a number between 300 and 800 that indicates your overall creditworthiness. If you default on a loan, make a late payment, or apply for credit, credit bureaus will note it on your credit history and lower your score. A higher score shows that you repay your loan on time and are less likely to default, making you an attractive borrower. To boost your credit score, here are a few things you can do:
- Pay bills on time and in full
- Consider using less than 30% of your overall credit limit
- Avoid taking on new debts or credits
- Keep your old credit card active- having a long credit history is good for your credit score
Keep Debt Low
One of the most crucial metrics lenders look for when reviewing your mortgage application is your debt-to-income (DTI) ratio. Lenders will review your DTI to ensure you can afford to make your monthly mortgage payments on time. To calculate your DTI, you’ll divide the total of your monthly debt by your gross monthly income. Current mortgage payments, rent, car payments, student loans, auto loans, child support, and credit card minimums should be included as part of your debt. Typically, a favorable DTI for a conventional mortgage is 36% or less. However, you might qualify for a mortgage with a DTI of up to 50% depending on your overall financial health and credit score. But if your DTI is too high, you can find ways to increase your income and start paying down your debt.
Ensure Your Income is Provable
Your mortgage lender will review your income, and that of any joint applicant to ensure it is what you say it is. So, before you apply for a mortgage, get your paperwork in order, including:
- Payslips: If you receive an annual bonus, ensure that you have the previous 12 months’ payslips at hand. Also, if you have more than one job, include the payslips for those jobs as well. If you have bonuses and overtime as part of your salary package, then these should be regular, and if possible guaranteed.
- Bank Statements: It’d be advisable to have at least 2 years’ bank statements in case the lender requests to see them.
If you run your own business or are self-employed, proving your income may be challenging if you don’t have complete and up-to-date accounts and records. So, ensure that you can verify your income with 1099s and profit and loss statements from the past two years.
Go Large with Your Down Payment
Having a larger down payment can boost your chances of getting a mortgage. That’s because a large down payment lowers the loan-to-value ratio, which increases your chances for mortgage approval. The loan-to-value ratio is typically calculated by dividing the mortgage by the sales price of the house. In addition to boosting your chances of securing a mortgage, a larger down payment and lower loan-to-value ratio may mean better mortgage terms, smaller monthly payments, and less interest over the life of your mortgage. Ultimately, when setting your down payment, keep in mind that a 20% or larger down payment will also mean that you won’t need to pay mortgage insurance, all of which will save you money.
Compare Mortgage Lenders
Lenders are different in how they underwrite mortgage applications as well as how they assign loan interest rates. As such, although one lender might reject your application, another may be more than willing to finance your home purchase. The more lenders you compare, the better your chances of getting one or more lenders to work with you to achieve your homeownership dream. Besides, you’ll enhance your chances of getting the lowest interest rates.
Want to Learn More?
Securing a mortgage is a vital step in the journey to buying a home. Once you’ve conquered all the what-ifs, you can now focus on the exciting aspects of buying a new home, like designing a backyard oasis and picking out paint colors.If you’re ready to make your dream of homeownership a reality, consult our real estate agents. We’ll guide you on how to boost your chances of getting a mortgage and help you find and buy your dream home. Call us and let’s get started!