Planning to apply for home financing? Here’s how to boost your chances of being approved
Whether you’re looking to invest in your current home or buy a new one, one of the most important questions that will come up is, “How will I finance it?”
If you’re planning to rely on financing for your home renovation or purchase plans, it’s important that you make the right choice – and have the best chances of being approved for the loan you want. The good news is that there are a few things you can do to improve your chances of getting the best home financing deal.
Pay off or reduce your unsecured debts like credit cards
One of the key things lenders look at in a mortgage or home loan application is your debt to income (DTI) ratio. Most lenders look for a debt-to-income ratio of up to 36 percent. While there are some exceptions to this rule, the general consensus is to aim for a DTI ratio lower than 36 percent – or as low as possible.
The lower your DTI ratio is, the better your home finance application looks to a lender because it illustrates that you have spare cash to put towards loan repayments each month (your monthly financial obligations).
Unsecured debt such as credit cards is also notorious for carrying higher interest rates, which means more of your payment is going towards interest payments. So, in the few months leading up to your financing application, work on paying down your debt if you can.
As you pay down your debt, it not only improves your DTI ratio, but it reflects positively on your credit report, and can lower the interest rates you are offered.
Keep an eye on your credit report
Most lenders will check your credit score when considering a home financing application. For a mortgage, the generally accepted credit score is 620. However, the better your credit score is, the better your chances are – and the better the interest terms you will be offered. Everyone is entitled to a free annual credit report from one of the three credit reporting agencies by visiting the AnnualCreditReport.com website.
Take note of any discrepancies on your credit report as well. According to a recent investigation from Consumer Reports, 34 percent of consumers have found an error on their credit report. Do this well in advance so you have enough time to dispute any errors and get them removed. The difference could be as much as 100 additional credit points.
Once you’re ready to apply, use research tools like US Banks’ Mortgage Calculator to get an idea of comparison rates and eligibility. Comparison rates give a better glimpse of the overall cost of the loan, and not just the interest rates. For instance, you may still need to pay account fees.
Forgetting this is a common but expensive property financing mistake made by homeowners, and one that could affect your affordability dramatically.
Work on establishing a steady income stream
Affordability is critical to lenders when judging a home loan or mortgage application. Essentially, they want to be confident that you can afford to repay the borrowed amount, plus the interest charged. Most lenders will want verification of your income, and proof of a stable income source.
So if you’re self-employed, you will need to show your federal tax returns for the last two years. If your debt to income ratio is high, you can work on improving your income streams by either picking up more work, or pursuing additional income streams like launching your own side hustle.
Finally, ensure you can document these changes. Bank statements, payslips, and profit and loss accounts are all good ways to document your affordability and show lenders you are a good candidate for financing.
Photo by Rowan Heuvel