So you have been pre-approved for a mortgage.
But the home you want to buy costs more than you’re pre-approved for.
This article explains how you can get approved for a higher loan amount.
Current Mortgage Rates (December 2020)
1. Raise Your Credit Score to Get a Lower Rate
The interest rate you receive on a loan is tied to your credit score. By raising your credit rating, you’re able to get a lower mortgage rate, meaning you’ll be approved for a higher loan amount.
Getting just a half a percent lower rate on your loan could allow you to borrow thousands of dollars more.
One of the most common ways borrowers can increase their credit rating in a hurry is by paying down their credit card balances. If you are carrying high credit card debt, your credit score is taking a big hit because your credit utilization ratio accounts for 30% of your overall score.
Tips to Improve Your Credit Score before Applying
Pay down credit card debt
Your credit utilization ratio is the amount of available credit you're using; it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the card's limit.
Don't apply for credit
Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You're also adding debt to your report, which can negatively affect your score.
Pay your bills on time
Your payment history accounts for 35% of your overall score. Don't miss a payment on any bills, set up auto-pay to ensure you don't miss any payments.
Dispute Innaccurate Items
You can dispute accounts you don't believe are accurate with the credit bureaus directly. They will investigate the account and must either verify it or delete it within 30 days.
Get added as an authorized user
If you know someone who has a credit card in good standing with no negative account activity ask them to add you to their account as an authorized user. The entire account history will be added to your credit profile which can increase your credit score.
2. Put 20% Down to Avoid PMI
Mortgage insurance is required for all mortgage loans with a loan-to-value ratio above 80%. Unless you have 20% down, you will be required to pay PMI. PMI rates can be as high as 1% of the loan amount, in some cases, costing you thousands of dollars per year.
Save up a 20% down payment so that you’re not required to pay PMI, and you will be approved for tens of thousands of dollars more than if you had to pay PMI.
Not only will a 20% down payment help you avoid costly mortgage insurance, but you will be financing a lower percentage of the purchase price, allowing you to afford a more expensive home.
3. Have Compensating Factors to Increase Your Max DTI Ratio
Your debt-to-income ratio (DTI ratio) is what determines how much you qualify to borrow. Your DTI ratio is the amount of your monthly debt obligations such as credit cards, student loans, mortgage compared to your monthly gross pre-tax income. Typically, lenders have a maximum DTI ratio of 43%.
If you have strong compensating factors lenders may be able to accept up to a 50% debt-to-income ratio.
Compensating factors for high DTI ratios
- High credit score
- Large cash reserves
- 5+ years at current employer
- Large down payment
- No payment shock
4. Consider a Longer Mortgage Term
Your debt-to-income ratio is the key factor in deciding what you’re approved for. The lower you can get your mortgage payment, the more house you can afford to buy. An adjustable-rate mortgage will have an initial term (usually five years) of a very low-interest rate and payment.
After the initial five year period, the interest rate and payment will increase annually. You can always refinance later on before your payment increases. This will give you the lowest mortgage payment allowing you to qualify for a more expensive home.
Some lenders now offer 40-year fixed-rate loans. This will give you the lowest payments allowing you to qualify for a more expensive home. Again, you can always pay a little extra each month to pay off the mortgage quicker than 40 years.
5. Add Other Sources of Income
An obvious way to increase the amount you’re approved for is to include all sources of income. If you receive alimony or child support, you may be able to use those payments as income. You will need to speak to an experienced loan officer about all of the other income sources you receive to see if it is eligible to be included.
Income Sources that May Qualify
- Alimony or child support
- Car allowance
- Capital gains
- Cash tips
- Disability income
- Employment offers or contracts
- Employment-related assets as qualifying income
- Foreign income
- Foster-care income
- Interest and dividends income
- Mortgage credit certificates
- Mortgage differential payments income
- Non-occupant borrower income
- Public assistance income
- Retirement, government annuity, and pension income
- Royalty payments
- Social Security income
- Temporary leave income
- Trust income
- Unemployment benefits income
- VA benefits income
6. Use a Co-Borrower to Add Income
A non-occupying co-borrower can be added to a mortgage to help low-income borrowers in some cases. A second borrower listed on the loan will allow you to add their income to the loan, thus increasing the amount you’re approved for. Your co-borrower must meet the minimum guidelines required by your lender.
7. Compare Loan Offers from Different Lenders
It’s always best to get loan quotes from at least 3-4 different mortgage companies when shopping for a loan. All lenders are not created equal. The various fees and interest rates they quote will vary from lender to lender.
If you speak to four different lenders, you will get approved for four different loan amounts. Use the loan quotes you get from each lender to help you negotiate the lowest fees and rate, which will also help you get approved for a higher loan amount.