Many people buying their first home have concerns about the mortgage not being approved. Without much of a credit history, it is understandable that you could face an unexpected denial for a mortgage after you find a home you like. However, there are ways that you can improve your odds of getting a mortgage approval. Try the following three methods to improve your approval odds.
Eliminate Your Debt
One factor that lenders consider is how much debt you currently owe to other lenders. This is a factor in your personal debt-to-income (DTI) ratio, which essentially tells the lender how much of your income goes toward paying off debt each month. In general, a mortgage lender is going to consider you a risk if your ratio is above 43%.
The best thing you can do about a high DTI ratio is to pay off your existing debts if you have the cash to do so. This includes car payments, student loans, and credit card payments. Once these are paid off, you will have more room in your finances to borrow money for a home, and you will have reduced your financial obligations moving forward.
Buy a Cheaper Home
If you can't yet pay off those existing debts, your next best option is to buy a cheaper home. A cheaper home results in a smaller mortgage, which can help your financial obligations fit under that 43% DTI ratio. It also demonstrates to a lender that you're not taking a big risk by purchasing an overly expensive home, which can make you look more attractive to them when you apply for the loan.
Make a Larger Down Payment
The financial risk that you are to a lender is ultimately determined by how big a loan you need to purchase. Another way you can lower that risk is by making a larger down payment on a home. Instead of paying the bare minimum down payment, try saving up for a 20% down payment. The remaining balance of the home is what is used to calculate your mortgage, and having a lower balance will lower those monthly payments even more.
In addition, putting 20% down on a home will result in not having to pay private mortgage insurance, which is another ongoing expense that you will pay that increases your monthly obligations.
For more tips on getting approved for a home loan when looking at homes for sale, be sure to ask your realtor and your mortgage lender. They can provide some helpful tips that you may not have thought of.