3 Factors Besides Your Credit Score That Impact Your Mortgage Approval Chances
If you're applying for a home loan, you probably already know that your lender will consider your credit score. Borrowers with higher scores often qualify for better rates and other benefits, but this one number is far from the only thing impacting your approval odds. When evaluating mortgage applications, lenders need to look at a much larger financial picture.
The good news is that a single number doesn't define your chances of buying a home. Instead, you may be able to improve other aspects of your financial health to more quickly increase your odds of approval or the maximum loan size available to you. If you're still focusing on your credit score alone, it may be time to consider these other three crucial factors.
1. Debt-to-Income (DTI) Ratio
DTI is arguably one of the more well-known factors lenders consider when evaluating mortgage applications. Lenders use DTI to grade your monthly debt payments versus your gross (pre-tax) income. Note that DTI only considers your payments, not the total amount of your loans. A large loan with a small payment will have a lesser impact on your DTI than a small loan with a large payment.
You generally want to keep your DTI (including your hypothetical mortgage payment) below 43%. If you know your current debt payments are high, you can reduce your DTI before applying for a mortgage by paying off credit cards or consolidating debts into a single payment. You may even want to consider refinancing existing debts, such as auto loans, to obtain lower payments and a lower overall DTI.
2. Credit Utilization
Credit utilization typically refers to money you spend on credit cards. The higher the balance on a card, the higher your credit utilization. Credit utilization affects your credit score, but lenders will also directly consider this value. In general, lenders will look at individual utilization (whether you have a maxed-out card) and overall utilization (how much of your total credit you use).
Fortunately, credit utilization is relatively easy to influence. You can reduce your credit utilization by paying down your credit cards or even requesting a limit increase on the cards you use the most. Working to reduce your credit utilization is one of the best things you can do before applying for a home loan.
3. Consistent Work History
Your debt and income are two sides of the same coin. In addition to considering your debts, your lender also needs to consider your job and salary. However, most lenders will look at more than just your paycheck. They also want to see consistent employment history, and having a solid history with a single employer is often beneficial.
As a result, it's often best to avoid substantial employment changes before applying for a mortgage. In particular, avoid significant career changes or moving to a job with a less predictable income. Even if these life changes don't affect your approval chances, they can result in a more extended approval and closing process.
Go to websites of loan and financing services for more information about home loans.