It’s not always easy to qualify for a mortgage. Lenders want to be assured that borrowers will be able to repay their loans. The following tips could help maximize your chances of qualifying:
Improve Your Credit Score
Your credit score is one of the first variables lenders take into consideration when deciding whether or not to approve your mortgage application. If you build and improve your credit score, you have a better chance of getting the mortgage you want and unlocking options for lower rates. You can start by first checking your credit score and then immediately begin working to correct any inaccuracies that may show up on your credit report. You should also consider limiting your credit applications, as submitting too many applications could negatively affect your score.
Keep Debt to a Minimum
Your debt-to-income (DTI) ratio is an important metric used by lenders to gauge your ability to make monthly mortgage payments. DTI is calculated by adding up all of your monthly debt payments and then dividing them by your gross monthly income. The Consumer Financial Protection Bureau has indicated that, in most cases, a DTI ratio of 43% is the highest ratio a borrower can have and still get a “qualified mortgage” (a mortgage that meets certain requirements for lender protection). You should consider paying off as much debt as possible, which could both lower your DTI ratio and improve your credit score.
Lenders also use your credit utilization ratio — the amount you currently owe divided by the unused credit available to you — to help determine your reliability. It’s important to keep your current debts to a minimum to reduce this ratio. Accordingly, you may want to rein in your spending on expenses and refrain from making any large purchases on credit until after you’ve qualified for a mortgage.
Save for a Down Payment
As lenders typically require down payments of 20% of the purchase price of a home, the best way to qualify for a mortgage is to plan and save well in advance. You should set aside as much as you can toward the down payment and other related expenditures, such as closing costs. If you can gather more than 20%, you could increase your chances of not just qualifying, but perhaps getting a lower interest rate. Conversely, if you are unable to make a 20% down payment, you may be required to purchase private mortgage insurance (PMI) to make up the difference for a lack of equity in the property in the beginning years of the mortgage.