Like many, you might not afford to complete a property purchase by cash. This makes financing and mortgage loans a better option, but unfortunately, not everyone can qualify for a mortgage either. However, some measures can increase your chances of being approved by making you attractive to lenders. Below are some tips to improve the chances of being approved for a mortgage.
1. Improve Your Credit Score
A higher credit score will make you reliable and trustworthy to lenders, which is good when asking for a loan. Typically, a good credit score range should range between 300 and 850. However, you should have a minimum score of 620 to be approved for a traditional mortgage loan. Even then, this doesn’t guarantee approval or the best rates, which is why boosting your credit score to 750 and above is important.
You can improve your credit score in several ways, such as paying all your bills on time, paying off existing debt, and avoiding credit card usage in the weeks or months before applying for a mortgage. Besides improving your credit, you should simultaneously fix any mistakes in your credit report.
Negative information on the report can reduce your overall score. Don’t presume that everything in the report is accurate. With an estimated 20% of credit reports containing errors, you should scrutinize the report for possible mistakes, such as already cleared debts, false information, and outdated information.
You should check your report six months before applying for the mortgage to give you enough time to fix these mistakes.
2. Save for a Large Down Payment
Making a significant down payment reduces your loan-to-value ratio, increasing your chances of being approved for a mortgage. The loan to value ratio refers to the percentage of mortgage amount from the total property value.
For instance, if the property is valued at $100,000, and you make a $20,000 down payment, your requested mortgage amount will be $80,000. The loan-to-value ratio will be 0.8 or 80%. You can reduce this ratio by saving for large down payments. For instance, if you save $40,000 for the same property, your mortgage drops to $60,000, and the ratio reduces to 60%.
Besides increasing your chances of approval, a high down payment is a gateway to better mortgage terms, such as low interest rates, small monthly payments, and long payment periods. Additionally, 20% or more down payment exempts you from private mortgage insurance.
3. Reduce Your Debt-to-Income Ratio
The debt to income ratio is the percentage of debt compared to your overall income. Lenders consider the debt to income ratio to evaluate your ability to pay monthly premiums. It also determines the cost of a property you can afford. Lenders prefer and approve a mortgage for borrowers with a 36% or less debt to income ratio.
Reducing monthly recurring debt and increasing monthly income can reduce this ratio. The best way to reduce monthly recurring debt is by buying less. Analyze where your monthly expenditure goes and find ways of cutting down these expenses. While increasing your income is challenging, you can work extra hours, take more responsibility, or find a second job.
Unlike before, restricted lending practices have made it difficult to secure mortgage loans. Fortunately, the tips mentioned above can improve your chances of being approved for a loan. Before applying for a mortgage, ensure that your desired property is worth taking a loan. As a buyer, you should consider several factors to find the best house to commit for purchase.