If you’re like most people, you’ll need a mortgage to make the greatest financial investment you’ll ever make—buying a home—a reality. There are certain things you can do to improve your appeal to lenders, even if there are no assurances that you’ll be approved for the mortgage you desire. Discover the finest advice for raising your chances of obtaining a mortgage by reading on.
1. Check Your Credit Report
To ascertain if you are eligible for a loan and at what rate, lenders examine your credit report, which is a thorough account of your credit history. Equifax, Experian, and TransUnion, the “big three” credit rating organizations, are required by law to provide you with one free credit report each every year. You may monitor your credit report all year long if you stagger your requests so that you only request a credit report once every four months (instead of all at once).
2. Fix Any Mistakes
Don’t assume everything in your credit report is correct after you obtain it. Look carefully to discover if there are any errors that might harm your credit. Things to be wary of:
- existing debts that have been paid (or discharged)
- information that is erroneous or not yours owing to an error (for instance, the creditor may have mistaken you for someone else due to your similar names, residences, or Social Security number).
- information that is false since it was stolen from you
- details from a past marriage that are no longer appropriate
- out-of-date information
- improper account closure notations (e.g., it shows the creditor closed the account when, in fact, you did)
Checking your credit report at least six months before you want to look for a mortgage will give you time to detect and correct any errors. If you do discover a mistake on your credit report, get in touch with the credit bureau as soon as you can to dispute the error and get it fixed. Use one of the top credit monitoring services to keep an eye out for any strange behavior for added peace of mind.
3. Improve Your Credit Score
A credit score is the single figure that lenders use to assess your credit risk and calculate how likely you are to make regular payments to repay a loan, while a credit report outlines your history of paying debts and other expenses. The FICO score, which is derived from many pieces of credit information in your credit report, is the most widely used credit score:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit – 10%
It pays to make every effort to attain the greatest credit score possible since, generally speaking, the better mortgage rate you may receive, the higher credit score you have. Check your credit report to begin with, make any necessary corrections, and then focus on debt repayment, setting up payment reminders to ensure timely payment of bills, maintaining low credit-card and revolving credit balances, and lowering the total amount of debt you owe (e.g., stop using your credit cards).
4. Lower Your Debt-to-Income Ratio
A debt-to-income ratio evaluates how much debt you have in relation to your gross income. It is determined as a percentage by dividing your total recurring monthly debt by your gross monthly income. When determining how much property you can afford to buy and how well you can manage your monthly payments, lenders consider your debt-to-income ratio.
A low debt-to-income ratio indicates that your income and debt are well balanced. A debt-to-income ratio of 36% or less is preferred by lenders, with no more than 28% of that debt (referred to as the “front-end ratio”) going toward mortgage payments. The greatest debt-to-income ratio you may typically have and still qualify for a mortgage is 43%. If your monthly spending are more than your income, most lenders will reject your loan application.
You may reduce your debt-to-income ratio in two ways, both of which are more difficult to implement than they sound:
- Reduce your recurrent monthly debt.
- Boost your monthly gross revenue.
Buying less is the single most crucial action you can take to lower your monthly recurring debt. Examine your spending carefully to identify areas where you may make savings, then take action to do so.
While there isn’t a simple solution to enhance your income, you may attempt to get a second job, put in more hours at your current job, assume more responsibility at work (and be paid more), or finish courses or gain a license to improve your abilities, marketability, and earning potential. If you’re married, taking on more job or returning to the workforce, if one of you has been a stay-at-home parent, is another way to raise your family income.
5. Go Large with Your Down Payment
Nothing demonstrates to a lender your ability to save better than a sizable down payment. A sizable down payment lowers the loan-to-value ratio, improving your chances of obtaining the desired mortgage. By dividing the mortgage amount by the home’s purchase price, the loan-to-value ratio is determined (unless the home appraises for less than you plan to pay, in which case the appraised value is used).Here is one instance. Let’s say you want to spend $100,000 on a home. You apply for a $80,000 mortgage with a $20,000 (20% down payment). ($80,000 mortgage divided by $100,000 is 0.8, or 80%, of the property’s value.)
Making a bigger down payment may decrease the loan-to-value ratio. If you can put down $40,000 for the same property, the mortgage would now only be $60,000, for example. With the loan-to-value ratio dropping to 60%, it will be simpler to get approved for the smaller loan amount. A greater down payment and lower loan-to-value ratio may result in better terms (i.e., a lower interest rate), smaller monthly payments, and less interest over the course of the loan, in addition to improving your chances of securing a mortgage.
When deciding on your down payment, keep in mind that a 20% or higher down payment also means you won’t be required to pay mortgage insurance, which may save you money overall.
The Bottom Line
Obtaining a mortgage has become more difficult due to stricter lending standards. The good news is that, particularly if you start early, there are actions you can do to increase your chances of being approved for a loan. Prior to working on raising your credit score, reducing your debt-to-income ratio, and actively saving for your down payment, start the process by reviewing your credit report and correcting any errors.
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