One of the most common questions I get is “How do I get the bank to approve me for more?”.
In a time of rapidly rising home prices, having budgetary constraints when bidding wars take place regularly is not a spot house-hunters want to find themselves in. So today I am going to review the three main pillars that lenders will consider when getting you Pre-Approved for a mortgage!
Debt to Income Ratios
Arguably the biggest factor when a lender is handling your mortgage application, is your debt to income ratios. In layman terms, the bank is considering how much money you make, how much debt (in particular monthly payments on debt) you already have, and therefore how much additional debt via your new mortgage you can afford. A general rule of thumb most lenders will use is that you can’t have more than 44% of your gross monthly income in debt and housing payments (ie. Property taxes and a small utility cost). There are always exceptions and different lenders may view certain debt payments differently, but the MORE income you can bring to the table and the LESS debt you have, the more likely you are to be approved for a higher mortgage amount.
3 Tips to Improve Debt to Income Ratios
Payoff debts where possible (in particular credit card debt)
Try to keep monthly payments small (specifically vehicle payments)
Increase income when possible (promotion, raise at work, second job)
Down Payment
There will typically be a minimum down payment of at least 5% that you will have to pay on a house you’re going to inhabit (this is called a Primary or Secondary residence), or a 20% down payment (generally) for a rental property purchase. Increasing your down payment is the second option to further increase your house hunting budget. This works in two ways; first more money down means more money to be paired with the mortgage funds to directly increase your budget. Secondly, it may allow for a higher mortgage amount to be approved. For example, if you were putting the minimum 5% down payment, your maximum purchase price would be capped based on that down payment (ie. A $400,000 house purchase requires a $20,000 minimum down payment). Even if you have a great debt to income ratio, with $20,000 for down payment, you can not go above $400,000 as a purchase price because of the need to have at least 5% down payment. Another example, would be if you were planning on using a 15-19% down payment, you would be approved for less than if you could make a down payment of 20%+. Since the qualification criteria differs based on down payment size, your mortgage Pre-Approval would noticeably increase if you could reach the 20% down payment threshold.
3 Tips to Improve Down Payment
Save, Save, Save! Try to sock away as much as possible each payday!
Gifts from immediate family are acceptable
Try to balance paying down debt with saving for a down payment (best to seek advice from a mortgage professional on the absolute best balance here)
Credit Rating
This one seems somewhat obvious, but depending on how strong your credit score/report is, lenders may offer you better/preferred interest rates. In addition, they may also be willing to increase the mortgage Pre-Approval by stretching your debt to income ratios further. The logic from the lender’s point of view is that someone with a strong history of handling credit/debt is likely to be more responsible with money and less likely to default on their payments. As a result, the lender may be willing to lend a little more to the individual with the strong credit rating, compared to someone with a poor score (all other things being equal).
3 Tips to Improve Credit Rating
Make sure you pay all your debt payments on time each month
Try to avoid using more than 50% of your credit limit on products
Pay in full any past debts that had missed payments or have gone into collection
Ultimately, while the above are the three main pillars that lenders look at when assessing your application and they give a good understanding of the basics of mortgage lending, there are a lot of intricacies to lending policies (both government regulated policies and individual lender policies). It is always best to speak with an expert when seriously assessing your own situation and preparing to get out on the house hunt!
Derek Malcolm
Home Financing Advisor
(1) 519-933-3335
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