Interest rates are on the rise and the cost of funds is now hovering just below 5 percent on the average 30-year fixed-rate mortgage. Following are tried and true techniques you can use to improve your mortgage borrowing power.
Paying off debt
This one is huge. Minimum payments on car loans, student loans, credit cards and consumer obligations can drive your borrowing power down. Such payments can hurt your ability to borrow because lenders do not look at the interest that you pay on such obligations, but rather the minimum payment that you pay.
For example, a car loan with a 5 percent interest rate and a payment at $400 per month, would be worse than a credit card with a $6,000 balance at $200 per month with a zero percent rate. It’s not the interest that you pay on the consumer obligations it’s the payments. The way lenders determine your ability to borrow is by taking your proposed total new mortgage payment plus your ongoing reoccurring expenses and they divide that number into your monthly pre-tax income. If this number exceeds 50 percent on most mortgages, then you’ll have a challenge. Paying off debt is a practical and prudent way to reduce your debt to income ratio subsequently improving your borrowing power.
Getting a co-signer
Sometimes practicality over pride can make sense. While it may be admirable to purchase a house 100 percent on your own without any help from anyone in certain financial situations, it’s a function of not having enough income to support the proposed debt load. Obtaining a co-signer can fix this problem because they are effectively lending you a portion of their borrowing ability.
Co-signing means the co-signer is 50/50 responsible for the mortgage just as you are they are just as liable for making that mortgage payment as you are in the event the other party does not make the payment. As such, the only way to remove a co-signer review is to refinance the mortgage or sell the property. The benefit to the co-signer is largely in part a higher credit score gained over time.
Changing loan programs
For example going from a Freddie Mac loan to a Fannie Mae loan might mean the difference between being able to perform on a contract versus not. Alternatively, going for an example from a conventional loan to an FHA loan also might mean the difference between being able to secure financing versus being turned down. Remember you can always refinance in the future as there is no limitations on refinancing down the line. Not all loan programs are treated equally and as such changing programs can and may have a dramatic effect on your ability to borrow.
Putting more money down
To be clear putting more money down to increase your borrowing ability may work, but it will not have as much of an effect on your borrowing power as paying off the debt to qualify would in most cases.
This one requires careful and specific attention from your loan officer. Change jobs before applying for a mortgage. This might include going from being an hourly employee to a salary employee in the same field. It also might be going from being self-employed to getting a full-time W2 job again in the same field. The key here is that you were in the same field or that a pattern can be drawn between one field to another and the jobs are in the similar field and similar capacity.
Any of the above suggestions are meant as informational and should be researched thoroughly for your unique individual situation.
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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.