It’s no secret that lender’s restrictions have tightened up since the housing crisis. Today, they have gotten slightly better; however, they still have more requirements than ever before. So how can you maximize your borrowing power?
You have to start early. That’s the key! The sooner you start working on your qualifying factors, the better chance you have of borrowing more money. Lenders look at the big picture when deciding how much to lend to you. While they have minimum credit scores and maximum debt ratios set, they look at everything together to determine your risk level.
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Read this guide to see the steps you can take to help you buy your dream home.
Maximize Your Credit Score
If there’s one thing most lenders look at first, it’s your credit score. It’s their first impression of your financial responsibility. Because of this, you want to make sure it’s as high as possible. You can start by looking at your credit history. You can obtain a free copy of your credit report from each of the three bureaus here.
Go through each report and look for the following:
- Do you own each of the accounts listed? If not, dispute the accounts with the credit bureau and the company providing the debt. You may have been subjected to identity fraud or it could have just been a keying error. Either way, you need to get it off your credit report.
- Are the payment histories accurate? Again, human mistakes happen. You may have late payments reporting that you never paid late. You’ll need proof of your timely payment. You’ll also need the time to get through the process with the credit bureau to prove your payments were on time.
- Do you have too much of one type of debt? A large portion of your credit score is the type of debts you have. Ideally, you should have an equal mix of installment and revolving debt. If you notice you have a large amount of revolving debt compared to installment loans, start paying the debts down or off completely.
- Do you have too much outstanding debt? Aside from the number of debts is the amount of revolving credit you have outstanding compared to the credit limit. Try to stick to 30% or less of your credit limit for the best results.
These tips will help you increase your credit score so that when lenders look at your application, they don’t immediately see red flags.
Watch Your Income
What type of income do you make? If you are self-employed or have a lot of unreimbursed employee expenses written off on your tax returns, you may want to omit some of these deductions for the two years leading up to your loan application.
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The more you deduct on your taxes, the less income lenders can use for qualifying purposes. Even if you work on salary, lenders want to see increasing income year over year, not decreasing. If you changed jobs, make sure it’s for a job with a similar or higher income. If you have to, figure out ways to supplement your income. However, if it’s a part-time job or side hustle, you’ll need to hold the position for at least 2 years before lenders will consider it true income.
Take a Longer Loan Term
If your debt ratio is close to the maximum, putting the brakes on your borrowing power, consider asking for a longer loan term. The typical maximum is 30 years, though. But, if you are looking at a 15, 20, or 25-year program, you might want to try a 30-year term. The longer your loan is stretched out, the lower the payments. Of course, this means you’ll pay more interest over the course of the loan since you borrow the money longer. But, if your goal is to borrow more money, this is a great way to make it worth within your parameters.
If you do take the longer loan term, you have the option to make higher payments as you can afford them. If a few years down the road you can start affording 25 or 20-year payments, go ahead and make them. This will knock the principal down faster, limiting the interest you pay, and helping you own the home faster.
Take on a Co-Borrower
If you were trying to get the loan on your own but you can’t borrow enough, consider adding a co-borrower. You can’t do this to overcome a low credit score, though. A co-borrower only helps with income/debt ratios. The lender will use the lowest credit score between both borrowers for qualification.
Where the co-borrower can help increase your borrowing power is with the income. More income can help to lower your debt ratio, which may allow you to borrow more. Keep in mind, though, you’ll have to include the co-borrower’s debts too. Make sure your chosen co-borrower is someone that has few debts and high income for the best results.
Accept a Gift
If you have family willing to give you a gift to pay for your down payment, accept it. FHA and conventional loans both allow borrowers to use funds from others as long as they are a gift and not a loan. A higher down payment can help increase your borrowing power by paying down the amount you need to borrow. This can subsequently help lower your loan amount, monthly payment, and effect on your debt ratio.
Before you accept gift funds, check with your lender. Make sure first that it’s allowed on the chosen program. Second, make sure the source of the funds is acceptable to the lender and the program you use to secure your funds.
Increasing your borrowing power isn’t impossible, but it does take some thinking outside of the box. Using as many of the tips above may help you borrow the amount you need to buy your dream home. As always, shopping around with different lenders can also help you make the most of your ability to borrow money for your home purchase.
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