If you are currently house hunting, no doubt you have a figure in mind for your budget. You will have a vague idea of what you can afford and what the monthly repayments will be. And then it happens: your dream home is in front of you, with all the potential it holds, and it’s just outside of your budget.
What is there to do? Well, it turns out quite a lot. You don’t need to keep hunting, although there is nothing wrong with seeing what else is out there, but you can also extend your borrowing power and land yourself a bigger mortgage and therefore a more valuable home. If you are interested in gaining a little bit more in your mortgage, read on for strategies on how you can convince your lender that you’re good for it.
Pay more up front
When you are thinking about your down payment, keep in mind that the more you put up front the less you will need to pay down the line. Even better if you pay it all in one go you will pay nothing down the line. Unfortunately, most of us aren’t that lucky, or have the entire value of a house just sitting nearby. So, settle for paying as much as you can on your down payment. If you have any assets tucked away, now is the time to use them.
There is also the PMI to think about. The PMI, or Private Mortgage Insurance is the mandatory extra payment that gets folded into your monthly repayments of your mortgage. It is designed to cover your lender should you stop paying andwill be folded in with your monthly payments. That is, unless you pay more than 20% on your down payment. 20% or more will convince your lender that you won’t renege on your payments, and you can forgo the extra payment.
It also goes without saying that you will gain interest on your mortgage repayments the longer they take to pay off, so the more you can pay off now will mean less interest in the future.
It has probably occurred to you that your lender will be looking at your income to determine what they should offer you. Something that might not have occurred to you is that the figure they are looking at isn’t limited to your 9-5 salary. There are a lot of additional income options you can present to your lender to assure him that you can afford a larger loan.
If you have any income earned from investments, or profits from rental properties, you can offer these as proof of extra income. Plus, accepted income includes money earned from alimony, child support, social security and money from a side business or a part time job. However, the latter two come with the requirement that you have to have been earning from your side business or job regularly for the past two years.
There is also the idea of assets held in the bank or anywhere else. If you have that extra cash at hand, tell your lender and prove to them that you have money stored away for a rainy day. It will go a long way to convincing them that you can afford to keep paying your mortgage even if something were to fall through, or you an expensive problem were to occur.
If you’re still unsure, you can use a home loan calculator to determine just how much you are entitled to and how much your repayments will be.
Wipe your debt
The first thing a lender is going to look at to determine how much you can borrow is your debt. Your debt-to-income (or DIT) ratio will be the deciding factor on the decision of how much you can afford to borrow. Your DTI is the minimum amount you are setting aside for monthly repayments of your debt, and as you will know, it eats into your leftover income, and therefore how much you can afford on a mortgage. Debt can outright block you from getting a mortgage if it’s bad enough. Lenders will typically allow for under 36% on your DTI, but some are known to go higher.
If you have the cash, say from assets or side earnings, wiping your debt entirely will make a big difference in how much you are offered. Failing that, you can quicken the time in debt and therefore lessen the interest on it by paying off more than the minimum required.
If you’re still having trouble, you can use a balance transfer card to help get rid of your debt or refinance an auto loan.
In order to gain the biggest loan and get approved for one, it would be in your best interest to wipe your debt as soon as possible.