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If you’re in the market to buy a new home, you likely know how important getting a mortgage preapproval is. This crucial step can help you ensure the home-buying process and put you ahead of the game in a busy housing market. But just securing a pre-approval isn’t enough. If you want to maximise your home buying power, you’ll need to do more than just the basics when it comes to strategy. In this blog, we will explore the top key methods to increase your mortgage pre-approval chances, making you ready to find your dream home. So now, let’s start your home ownership journey.
What Is A Mortgage Pre-Approval?
A mortgage pre-approval is an important part of the home-buying process, letting you know from a lender how much you qualify to borrow for your new home. This is different from prequalification, which is a less formal assessment of your financial situation.
Consider a mortgage pre-approval as a thumbs-up signal from the lender that you’re the real deal buyer in the eyes of the housing market. This includes a complete assessment of your financial well-being, creditworthiness, and capacity to refinance the home loan. Here’s what you need to know:
- Initial Application: You’ll have to apply with a lender to begin the pre-approval process. This usually entails supplying extensive data about your income, employment record, assets, liabilities and other financial aspects.
- Credit Check: Lenders will run your credit and evaluate the score. An excellent pre-approval needs a solid credit history. Make sure to take care of any credit report discrepancies or issues beforehand.
- Documentation: You will want to make sure you have gathered and have on hand all the necessary documentation, such as Pay Stubs, Tax Returns, Bank Statements, and other requested financial records. This helps the lender to verify the financial stability.
- Assessment: The lender reviews your finances, crushes the numbers, and figures out how much they can lend. This is determined using your debt-to-income ratio, credit score, and other financial information.
- Preapproval Letter: If you qualify, you’ll get a pre-approval letter. This will detail the max loan amount, the interest rate and the duration of the pre-approval, which is usually 60-90 days.
- Shopping Advantage: With a pre-approval letter, you’ve got the edge. You and your agent will be taken seriously by sellers and agents, allowing you to make offers with confidence within your budget.
- Rate Lock Option: A few lenders might put a rate lock option in your pre-approval. This is useful if you expect rates to rise in the future.
What Determines Your Pre-Approval Amount?
The amount you’re pre-approved for when getting a mortgage isn’t a random number—it’s calculated based on a detailed analysis of your financials. Your pre-approval amount is determined by a number of significant factors. Let’s discuss them.
1. Credit Score: A major influencer is your credit score. Lenders use this 3-digit number to judge your creditworthiness. The higher pre-approval amount results from a higher credit score, which signifies lower credit risk. Similarly, a poor score can reduce your ability to borrow or result in higher rates.
2. Income and Employment: Lenders consider the stability of your income and how long you’ve been employed. They need to ensure you have a stable income to repay the loan. A consistent and provable income could increase your pre-approval amount.
3. Debt-to-Income Ratio (DTI): This is a critical ratio that shows how much your monthly debts are compared to the amount of money you make. Lenders like to see a lower DTI, typically less than 43%. A high DTI could cap your pre-approval amount since it indicates more risk in taking on more debt.
4. Down Payment: Your down payment can directly impact your preapproved amount. A larger down payment means less money is needed for the loan and can result in a higher pre-approval amount. A larger down payment will translate into more favourable rates and conditions.
5. Loan Term and Interest Rate: The type of mortgage you’re seeking and the current interest rates also play a role. An adjustable-rate mortgage may begin with a lower interest rate but may eventually see rate increases, whereas a fixed-rate mortgage normally offers more predictable payments. Your preapproval amount depends on the interest rate you are qualified for.
6. Other Financial Obligations: Lenders consider other financial responsibilities such as alimony, child support, or student loans. These obligations can reduce the amount you’re preapproved for.
Top 7 Ways To Improve Your Home Borrowing Power
A number of factors determine your borrowing power. From increasing your credit score to minimising outstanding debts and building up a bigger down payment, we walk you through all the crucial moves you need to make in order to improve your odds of getting approved for the mortgage you want.
1. Boost Your Credit Score
It is important to realise that your credit score can either boost or limit your ability to borrow. They use it to determine how likely and risky it is to lend money to you. A better credit score can further your chances of getting a loan, and even interest rates as little as 1% can subsequently save you thousands over the life of your mortgage.
To boost your credit score:
- Check Your Credit Report: Begin by getting a free copy of your credit report from the top credit bureaus. Thoroughly examine, scrutinise, and promptly dispute any inaccuracies you see.
- Pay Bills on Time: Making your credit card, loan, and other payments on time is vital to building a good credit score. Schedule reminders or set up autopay to avoid overdue bills.
- Maintain Older Accounts: The length of your credit history matters. Leave your older and well-maintained accounts open – show a history of creditworthiness.
2. Reduce Outstanding Debt
Excessive amounts of debt can reduce your ability to borrow by inflating your debt-to-income(DTI) ratio. Lenders favour borrowers with lower DTIs because it indicates they have higher mortgage payback capacity.
To reduce outstanding debt:
- Create a Budget: Create a detailed budget by tracking your income and expenses. Identify areas to cut expenses & divert those savings to paying down debt.
- Prioritise High-Interest Debt: Prioritize paying off the highest-interest debts, such as credit card balances. Making higher payments on these debts will also allow you to get rid of them faster.
- Avoid New Debt: Avoid incurring new debt while working to pay down existing debt. This includes not using credit cards for major purchases.
3. Increase Your Income
An increased income can greatly increase your borrowing power and boost your debt-to-income ratio. Lenders prefer borrowers whose incomes are stable and rising – it signifies that the mortgage will be handled.
To increase your income:
- Negotiate a Raise: If you have a salary job, you might want to negotiate a raise with your employer based on how well you’ve performed and what market rates are going for.
- Seek Additional Income Sources: Consider getting side hustles or part-time work to add to your main job. Additional income can increase borrowability.
- Invest Wisely: Explore passive income generators like real estate investing, rental properties, and dividend stocks.
4. Save for a Larger Down Payment
A higher cash deposit cuts the necessary loan size and makes you demonstrate your financial ability to lenders. This can result in reduced rates and more favourable terms.
To save for a larger down payment:
- Set a Savings Goal: Decide on the down payment amount and create a measurable goal for savings. Create a realistic schedule to accomplish it.
- Cut Unnecessary Expenses: Go over your spending and find places you can save. Move that money to your down payment savings account.
- Consider Down Payment Assistance Programs: Look into local and federal DAPs, which can get you there faster.
5. Minimize Credit Card Utilization
Higher credit card balance — when you have a considerable amount of money on revolving accounts, it can adversely influence your credit score rating and borrowing capacity. Lenders perceive that as a sign of financial hardship.
To minimise credit card utilisation:
- Pay Balances in Full: Pay your credit card balances in full each month whenever possible to avoid high balances carrying over.
- Increase Credit Limits: As long as you don’t spend more, asking for a higher credit limit can lower your credit utilisation rate.
- Use Credit Sparingly: Reserve credit cards for emergencies or exceptionally expensive things.
6. Keep a Stable Employment History
Consistency in employment histories helps prove financial reliability and a stable source of income, which is a distinct preference among lenders. Multiple positions or voids in employment history can cause red flags to go up.
To maintain a stable employment history:
- Avoid Frequent Job Changes: While getting ahead is important, avoid a lot of job hopping unless it makes a big difference in your money or trajectory.
- Stay in the Same Field: Lenders typically consider remaining in the same industry as a good indication of reliability.
- Explain Employment Gaps: If you’ve got gaps in your employment, be ready with an explanation — say, pursuing further education or taking time off for personal reasons.
7. Reduce Other Financial Commitments
Apart from Mortgage liabilities, different financial liabilities can affect your borrowing power. Lenders factor in continual debt such as alimony, student loans and child support when determining your ability to pay a mortgage.
To reduce other financial commitments:
- Reevaluate Obligations: When appropriate, engage legal and financial professionals to review and potentially rework any financial obligations that may impact your borrowing power.
- Plan Ahead: If you anticipate changes in your financial obligations, such as the end of alimony payments, inform your lender to ensure your financial situation is accurately considered.
How Much Will I Be Preapproved For?
When evaluating your application for preapproval, a mortgage lender will consider your income, assets, and credit history. The specifics of your financial status will significantly influence the amount of preapproval you receive. You should, however, determine for yourself what amount of mortgage payment will fit into your budget regardless of what you were originally preapproved for. The majority of experts recommend not investing more than 30% of your monthly income in housing costs, such as electricity, homeowners insurance, and HOA dues. Even if it’s immensely alluring to look for a more costly home with all of the features on your wish list, your present financial situation could not allow for a higher mortgage.
Pitfalls To Watch Out During The Preapproval Process
1. Co-signing A Loan: Your preapproval may be impacted if you co-sign a loan for a friend or family member. When you co-sign, you take on joint liability for the loan. Lenders take into account payments even if you aren’t the one paying them; this has an impact on your DTI. If co-signing has a severe negative influence on your financial situation, it may cause a reduction in the preapproval amount or possibly a loan refusal.
2. Making Large Expenses: Large expenses can raise your debt and mess with your debt-to-income ratio (DTI), like buying a new automobile or financing pricey goods. Your DTI is carefully examined by lenders when they decide how much you may borrow. Large purchases may result in larger monthly loan payments, which might lower the amount of the mortgage you are preapproved for. It’s advisable to postpone significant purchases until after you’ve obtained your mortgage.
3. Moving Around Large Sums Of Money: While having enough money set up for your down payment and closing fees is important, lenders may get suspicious if you transfer a sizable amount of money between accounts. Frequent transfers or mysterious deposits might make the paperwork process difficult and cause your preapproval to be delayed. It is advised to keep your financial situation steady during the preapproval procedure and to retain a complete paper record of all cash movements.
4. Applying For A New Credit: Applying for new credit is one of the worst mistakes you can make when being preapproved. Each time you apply for credit, a hard inquiry is normally made on your credit report, which might temporarily reduce your credit score. Your preapproval amount and interest rate may change if your credit score drops. It’s best to hold off on applying for new credit accounts like credit cards or loans until you’ve closed on a mortgage.
Build Your Dream Home With Top Luxury Property
Making the most of your mortgage preapproval is a calculated choice that could significantly boost your purchasing power in the real estate sector. You’ll be in a better position to get the house of your dreams if you adhere to the tips put forward in this guide. This will help raise your credit score, save for a larger down payment and pay off debt. Contact the professionals at Top Luxury Property today.