Most people who buy property can’t pay for it outright. Rather, they need to take out a mortgage and pay it off over time. But not everyone can qualify for a home loan, so if you want to increase your chances of approval, take these important financial steps.
1. Boost your credit score
The higher your credit score, the more trustworthy a borrower you’ll seem to be in the eyes of lenders -- and that’s a good thing when you’re asking for what could be a sizable home loan. You can boost your credit score in a number of ways: First, be on time with all of your bill payments in the months leading up to your application. Your payment history is the most important factor that goes into calculating your credit score, so you can’t afford to be late.
Next, pay off a chunk of existing debt. Doing so will lower your credit utilization ratio, which measures the amount of available credit you’re using at once. The lower that number, the more it helps your credit score.
Finally, avoid opening new credit cards in the weeks (or even months) prior to applying for your mortgage. Each time you apply for a new type of financing, it results in a hard inquiry on your credit record, which can knock down your score.
2. Avoid large purchases in the months leading up to your application
In addition to your credit score, mortgage lenders will look at your debt-to-income ratio to determine whether you’re eligible for a home loan. This ratio measures the amount of outstanding debt you have relative to your income, and the lower it is, the better. Financing major purchases, on the other hand, will increase your debt-to-income ratio, so hold off on them until after your mortgage is in place.
3. Fight for a raise
The higher your income, the greater your chances of getting approved for a mortgage. Scoring a raise could help improve your debt-to-income ratio, so if you haven’t seen a pay boost in quite some time, schedule a meeting with your employer to discuss an increase. It’ll help if you research salaries in your industry beforehand to see how your current salary stacks up, because if you can prove to your employer that your wages fall below the average for your position, that’s a pretty compelling argument in your favor.
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4. Check your credit report for mistakes
Negative information on your credit report could bring down your credit score. But what if that information is actually false? It’s estimated that 20% of credit reports contain errors, and spotting and correcting a mistake on yours could help your score improve, thereby increasing your chances of mortgage approval. You’re entitled to a free copy of your credit report every year from each of the three major reporting bureaus -- Equifax, Experian, and TransUnion -- so dig up the data those folks have on file for you, and make sure it’s accurate.
5. Save for a larger down payment
The more money you put down on your home, the lower your loan-to-value ratio will be. That ratio measures the size of your loan relative to your property’s value, and the higher it is, the more risk your lender takes on. Ideally, you want to keep that number at 80% or below for a conventional mortgage, because if you do, you’ll be more likely to not only get approval, but snag a favorable interest rate on your loan. Therefore, saving for a larger down payment could be an important step in securing a mortgage.
There’s another benefit to increasing your down payment as well: If you manage to come up with 20% or more of your home’s purchase price, you’ll avoid private mortgage insurance, or PMI. PMI is a premium that’s tacked onto your monthly mortgage costs, and its purpose is to protect your lender -- but you’re the one who pays for that protection, so you’re better off avoiding that added expense.
Buying a home is a big step, and you’ll most likely need a mortgage to make it happen. Make these key moves, and with any luck, your home loan application will be approved, and you’ll lock in an interest rate that keeps your mortgage nice and affordable.