by Maurie Backman | Updated July 19, 2021 - First published on Oct. 12, 2020
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Mortgage rates may have been low in September, but borrowers didn't always have an easy time snagging them.
September was a good time to get a mortgage, at least from an interest rate perspective. The 30-year loan averaged under 3% that month, which gave borrowers an opportunity to lock in affordable housing payments.
But despite those low rates, many mortgage applicants struggled to get a home loan. The reason? Lenders imposed higher standards for borrowers.
The Mortgage Bankers Association's Mortgage Credit Availability Index fell 1.9% to 118.6 last month, which indicates that lenders employed stricter requirements for borrowers. Given that the U.S. economy is still in a recession, and that unemployment has been devastatingly high since April, it makes sense that lenders would want to protect themselves. But that doesn't make things easier for borrowers.
If you've had a hard time getting approved for a mortgage this year due to tighter borrowing requirements, there are a few things you can do to increase your chances of success. Start with these:
Secure access to The Ascent's free guide that reveals how to get the lowest mortgage rate for your new home purchase or when refinancing. Rates are still at multi-decade lows so take action today to avoid missing out.
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The higher your credit score, the more faith mortgage lenders have in your ability to repay your home loan on schedule. Under normal circumstances, you need a minimum credit score of 620 to get a mortgage, but ultimately, each lender sets its own standards, and today's lenders may be seeking applicants with much higher scores. If you can increase your credit score, you stand a greater chance of getting approved for a mortgage.
The best way to boost your credit score is to pay all your bills on time. Eliminating credit card debt will also help, as will getting a credit limit increase (that may seem counterintuitive, but the less of your available revolving credit you use at once, the more your score stands to improve, and raising your credit limit will help). Furthermore, be sure to check your credit report for errors and correct those that may be bringing your score down, such as a delinquent debt you've already settled. You're entitled to a free copy of your credit report every week during the pandemic, so it's easy enough to get that information.
Your debt-to-income ratio measures your existing debt relative to your income, and the lower it is, the more appealing a loan candidate you'll be. That's why it makes sense to eliminate some of your debt before applying for a home loan. Paying off an auto loan early, for example, could help you get approved to buy a home.
Mortgage lenders want to make sure you earn enough money to cover your loan payments, so the higher your paycheck, the more confidence they'll have. Of course, you can't just march into your boss's office and demand a raise on the spot, but you can consider getting a second job temporarily so you're able to show a higher income. To be clear, you can't just do that job for a month and call it quits. Your lender will want proof that the income you claim to earn is stable and consistent. But if you're willing to make the effort, you may have an easier time not just getting a mortgage, but keeping up with mortgage payments.
Today's low mortgage rates make it a great time to lock in a home loan. If you've had trouble getting approved, work on the items above to make yourself a more viable mortgage candidate. There's a chance lenders could get even stricter in the coming months, so the more you do to improve your financial picture, the more likely you'll be to get the mortgage you're after.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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