Before the financial crisis, anyone who could fog a mirror could qualify for a mortgage. Since then, government regulation has made getting approved for a mortgage anything but a sure thing. The requirements are more onerous than they were 10 years ago and debt-to-income ratio requirements are more stringent than in the past. Although it may be more challenging to get a mortgage, it is not impossible.
Use these 8 tips to make your mortgage application more likely to be approved:
1. Have a significant down payment
Borrowing less money will increase the odds that you can get approved. The bank will feel more comfortable the larger your down payment is as a percentage of the sale price. Especially if your income or credit score are unimpressive, a larger down payment can make a big difference.
2. Pay down debt
Your debt utilization rate should be less than 30% to maximize your chances of getting approved. This means that if your credit cards have a combined limit of $10,000, your outstanding balances should not be above $3,000 at any point during the month. Another way to lower your debt utilization is to raise your credit limit provided you don’t turn around and borrow even more.
3. Keep your job
Changing jobs frequently will make your lender nervous. Prove to them that you and your income are stable by staying with employers for at least two years and absolutely avoid changing employers during the application process.
4. Minimize your monthly debt commitments
If you have payments on multiple credit cards, a student loan, a car payment, alimony, and home-equity loan due every month there is probably not much left over for a mortgage payment.
5. Have realistic expectations
If you only make $50,000 per year, an application for a $800,000 mortgage is likely to be denied instantly. Your mortgage payment should be at most 25-30% of your monthly income. You could also increase your income to be sure that you can make your mortgage payments.
6. Fix your credit score
Prior to beginning the search for your new home, get a copy of your credit report. If your credit score is less than 680, you will likely struggle to qualify for a mortgage. There are many online resources with information about how you can raise your credit score. That said, be wary of companies selling credit repair services.
7. Be ready to negotiate for a lower sale price
Just like raising your income or searching for a home at a lower price point, anything that reduces the amount of money you need to borrow is helpful.
8. Give yourself plenty of time
None of the above advice can be used on short notice. Ideally you should plan for a new home purchase a year or more in advance. There is little that can be done to enhance your application in just a month or two. Sit down with a loan officer to review your situation and make a plan. A financial decision that will affect you for up to 30 years or more is serious business. Put in the work up front to make yourself more likely to be approved.
Overall, your focus should be on making your application as attractive to your lender as possible. Minimize your debt, have a significant down payment, and have conservative goals. Remember that lenders are interested in finding as low a risk borrower as possible. Do that and your odds of getting approved will be greatly enhanced.