How First Time Homeowners Can Boost Their Mortgage Borrowing Power

How First Time Homeowners Can Boost Their Mortgage Borrowing Power

With home prices rising you may be wanting to know how you could secure a higher mortgage loan. After all, you may need one if the buying price exceeds your initial estimate or if you do not have enough money for a down payment. However, obtaining a larger mortgage is not as simple as some first-time homebuyers believe. Mortgage lenders are being more careful about providing big sums of money, especially post-covid.

So, if you want to buy a property that exceeds your maximum budget or the amount you have been approved of, here are a few tips to make yourself more appealing to lenders and boost your borrowing power.

1. Increase Your Credit Rating

Maintaining a high credit score (preferably above 750) can help you qualify for a home with a better interest rate as it implies that you have a strong repayment capacity A lower interest rate translates to reduced monthly payments directly increasing your purchasing power. There are several ways to boost your credit score.

  • Pay all your bills in time and in full.
  • Pay down a portion of your debt especially credit card balances.
  • Use only 30% of your total available credit.
  • Do not open new credit cards or apply for any new type of financing a few months before you apply for a mortgage.

Finally, you should also check your credit score regularly. It is estimated that 20% of credit reports contain inaccuracies, so detecting and fixing one on yours could help you boost your score. Even a half-percentage-point reduction in your loan rate could allow you to borrow hundreds of dollars more.

2. Put down At Least 20%

The size of your down payment is one of the most crucial elements in determining how big of a mortgage you may get accepted for. You can secure a mortgage with a lower down payment. However, a 20% down payment will not only save you money on private mortgage insurance (PMI), but it will also reduce your loan amount allowing you to afford a more expensive home.

3. Find Someone to Co-Sign Your Mortgage

Applying for a mortgage with a partner may also help you qualify for a larger loan. This is because the qualifying amount is calculated based on your combined income.

You could look to your Mom and Dad for some assistance, or simply add your spouse or friend as the co-borrower. However, your co-signer must meet the requirements for a mortgage loan, which include a steady income and a good credit score.

In addition, when looking for a co-signer, ensure that they are aware of the loan’s terms and restrictions. Make sure you are aware of your mortgage’s legal duties. Understand that if you miss a payment, the creditor will demand payment from your co-signer.

4. Show Additional Sources of Income:

Finding a new source of income is another strategy that could help you get a bigger loan. These days it is easier, thanks to the gig economy. Lots of people do double jobs and take up a side hustle to bring in more cash. However, the restriction is that this income must be somewhat predictable and projected to continue in the future.

Lenders consider the following types of income in addition to salary or wages:

  • Interest or earnings from assets
  • Rental property income
  • Alimony or child support
  • Car allowance
  • Cash tips
  • Royalty payments from published works
  • Social security income
  • Trust income
  • Interests and dividends income
  • Capital gains
  • Retirement, government annuity, and pension income

5. Increase Your Max DTI Ratio by Providing Compensating Factors

The amount you can borrow is determined by your debt-to-income ratio (DTI ratio) which is the percentage of your monthly income that you spend on minimum debt payments. A Debt-to-income ratio of 43% or less is regarded as desirable and helps you qualify for a larger mortgage. If you have significant compensatory characteristics, you may be allowed to borrow a higher percentage. These include:

  • Cash Reserves – Lenders want to see that you have at least three months’ worth of mortgage payments in savings.
  • Payment shock – This is the gap between what a borrower is paying in housing costs now and what their mortgage payment will be in the future. If a borrower pays $2,000 in rent per month, there’s a strong probability they’ll be able to afford a $2,000 mortgage payment.
  • Job Stability – Mortgage underwriters prefer candidates with job stability, especially if they have credit concerns or a high DTI ratio. Working with the same company for three years or more is likely to boost your loan application.

Here’s the rub: there’s a catch. You cannot expect a lender to notice your compensating variables. You need documentation. So, begin compiling proof of these things even before you apply for a mortgage.

We understand that all this may seem intimidating. This is a wonderful place to start as Ratebeat mortgage offers a variety of home loan products to help our clients achieve their dream of homeownership. When you are ready to apply/be pre-approved our experts will also assist you in finding a lower mortgage rate.