Home prices are still rising (though at a slower rate than they were). And that means that many home buyers may need a bigger mortgage than they had anticipated. So, as a New Jersey home buyer facing higher prices, you probably want to know how to qualify for a larger mortgage loan. There are many things you can do to that end, but some are far more effective than others. Here, then, are our top tips to help New Jersey home buyers get approved for a higher mortgage loan.
1. Improve Your Credit Score
Of course, one of the best things New Jersey home buyers can do to get approved for a higher mortgage loan is to improve their credit score. The primary mechanism here is that a better credit score allows you to get a lower mortgage rate, which in turn usually allows you to borrow more.
“The interest rate you receive on a loan,” experts say, “is tied to your credit score. By raising your credit rating, you’re able to get a lower mortgage rate, meaning you’ll be approved for a higher loan amount. Getting just a half a percent lower rate on your loan could allow you to borrow thousands of dollars more. One of the most common ways borrowers can increase their credit rating in a hurry is by paying down their credit card balances. If you are carrying high credit card debt, your credit score is taking a big hit because your credit utilization ratio accounts for 30% of your overall score.”
Other things you can do to improve your credit score include:
- Not applying for additional credit – “Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You’re also adding debt to your report, which can negatively affect your score.”
- Paying bills on time – Your payment history accounts for 35% of your overall credit score, so it’s imperative that you pay bills on time. A good way to ensure that you do is by setting up an auto-payment system.
- Disputing errors and inaccuracies – If you find errors/inaccuracies in your credit report you can dispute these. “You can dispute accounts you don’t believe are accurate with the credit bureaus directly. They will investigate the account and must either verify it or delete it within 30 days.”
- Get added to another account as an authorized user – “If you know someone who has a credit card in good standing with no negative account activity ask them to add you to their account as an authorized user. The entire account history will be added to your credit profile which can increase your credit score.”
2. Increase Your Maximum DTI Ratio
A related way to increase your chances of getting approved for a higher mortgage loan is to increase your maximum debt-to-income (DTI) ratio. This ratio plays a huge role in how much you can borrow because it is an important factor when lenders determine how much risk you present as a borrower.
Your DTI ratio “is what determines how much you qualify to borrow. [It] is the amount of your monthly debt obligations such as credit cards, student loans, mortgage compared to your monthly gross pre-tax income. Typically, lenders have a maximum DTI ratio of 43%. If you have strong compensating factors lenders may be able to accept up to a 50% debt-to-income ratio.”
The important compensating factors you can improve to achieve a higher DTI ratio and so qualify for a higher mortgage loan include:
- Large cash reserves on hand
- High credit score
- Large (or larger) down payment
- More than 5 years with your current employer
3. Try for a Longer Mortgage Term
You can also try for a longer mortgage term to get approved for a higher mortgage loan. A longer mortgage term typically means lower monthly mortgage payments, and, as a result, you can usually afford more home. A couple of options here are an adjustable-rate mortgage and a longer fixed-term mortgage.
“An adjustable-rate mortgage will have an initial term (usually five years) of a very low-interest rate and payment. After the initial five-year period, the interest rate and payment will increase annually. You can always refinance later on before your payment increases. This will give you the lowest mortgage payment allowing you to qualify for a more expensive home.”
“Some lenders now offer 40-year fixed-rate loans. This will give you the lowest payments allowing you to qualify for a more expensive home. Again, you can always pay a little extra each month to pay off the mortgage quicker than 40 years.”
Keep in mind, though, that local market conditions and factors can also play a role in which option is best for you. You can contact a New Jersey agent at 855-966-DEAL to find out more about this.
4. Show More Income and Increase Cash Reserves
Showing more income and/or increasing your cash reserves can also allow you to get a higher mortgage loan.
Showing more income doesn’t necessarily mean you have to go out and get a second job or push for a raise. Remember: we said to show more income, not make more money. You likely already have other sources of income that you can use to show more income. Consider using the following as “other sources of reliable income to qualify for more”:
- Rental income
- Interest/dividends from investments
- Alimony or child support
- Income from a side hustle
A good amount of cash reserves can also help New Jersey home buyers get approved for a higher mortgage loan. Here’s why . . .
“While you won’t necessarily need cash reserves to qualify for a mortgage, having additional assets in the bank or elsewhere can help you qualify for a bigger loan. If you have some funds stashed away, you’ll be able to weather an unexpected expense and continue to make your mortgage payments. If not, one emergency could cause you to fall behind, and make a lender less comfortable offering you more.”
Bonus Tip: Work With an Experienced New Jersey Agent
And working with an experienced local agent can go a long way toward helping you get approved for a higher mortgage loan. While not a financial advisor or loan officer, your New Jersey agent will nevertheless have a thorough understanding of the conditions obtained in the local market and the tactics that will work best to help you borrow more. If getting approved for a higher mortgage loan is your goal, be sure to contact us today at 855-966-DEAL.