6 Tips for Getting Approved for a Mortgage

A home is an important part of life—it's where memories are made, and families are grown. But it is one of the most expensive purchases you'll ever make, so like many people, you're likely asking yourself how to ensure you get approved for a mortgage.

There are many ways to prepare for home ownership—you can use a co-signer, wait for better market conditions, improve your credit score and report, find a less expensive home, ask for an exception, or find another lender. Keep reading to learn about these six tips and how they can help you position yourself for purchasing a home.

1. Get a Co-Signer

If your income isn't high enough to qualify for the loan you're applying for, a co-signer can help. A co-signer helps you because their income will be included in the affordability calculations. Even if the person isn't living with you and only helping you make the monthly payments, the bank will consider a co-signers income. Of course, the key factor is to ensure that your co-signer has a good employment history, stable income, and good credit history.

In some cases, a co-signer may also be able to compensate for your less-than-perfect credit. The co-signer guarantees the lender that your mortgage payments will be paid.

It's important that both you and the co-signer understand the financial and legal obligations that come with cosigning a mortgage loan. If you default on your mortgage, the lender can go after your co-signer for the full amount of the debt. Also, if payments are late or you default, both parties' credit scores will suffer.

2. Wait

Sometimes conditions in the economy, the housing market, or the lending business makes lenders stingy when approving loans. Regulators scrutinize banks to ensure they're not taking on more risk than they can handle. If the economy doesn't support a robust housing market where banks are actively lending, perhaps it's best to wait until the market improves.

While you're waiting, home prices or interest rates could fall. Either of these changes could also improve your mortgage eligibility. On a $290,000 loan, for example, a rate drop from 7% to 6.5% will decrease your monthly payment by about $100. That may be the slight boost you need to afford the monthly payments and qualify for the loan.

3. Work on Boosting Your Credit Score

You can work on improving your credit score, reducing your debt, and increasing your savings. To work on your credit score, you should first obtain a copy of your credit report. The Federal Trade Commission has helpful information about getting a free credit report on its website. The report will list your credit history, open loans, credit card accounts, and track record for making timely payments. Once you have the report, you can obtain your credit score from one of the three credit agencies.

Build Your Credit History

If you don't have a lot of credit history, it can hurt your chances of getting approved for a mortgage. Consider opening a secured credit card with a small credit limit. Secured cards require you to have an amount of cash saved with the credit card company that matches the card's available credit.

A secured card eliminates the credit card company's risk, which improves your chances of getting approved. Also, a secured credit card is a great way to build your credit history and show banks you can borrow from a card and pay off the balance each month. However, if you have too many cards open, opening another one may hurt your credit score.

Manage Your Credit Cards

Making on-time payments is critical to boosting your score. Also, pay off some of your debt so that your card balances are not close to the card's credit limit, called credit utilization. Credit utilization is a ratio reflecting the percentage of a borrower’s available credit that's being utilized.

For example, if a credit card with a $5,000 limit has a $4,000 balance, the ratio is 80% or ($4,000 (balance owed) /$5,000 (limit)). In other words, 80% of the card's available credit has been used. Ideally, the lower the percentage, the better, but many lenders like to see at least a 30% or lower utilization ratio.

If banks see that you're close to maxing out your cards, they'll view you as a credit risk. For example, if you can't make timely payments or reduce a credit card with a $3,000 balance over time, banks are unlikely to believe you can repay a $200,000 mortgage loan.

Calculate Your Debt-to-Income Ratio

Banks love to analyze your total monthly household debt as it relates to your monthly income, called the debt-to-income ratio. First, total your monthly gross income (before taxes are taken out). Next, total your monthly debt payments, which include a car loan, credit cards, charge cards, and student loans. You'll divide your total monthly bills by your gross monthly income.

If, for example, your debt payments total $2,000 per month and your gross income is $5,000 per month, your debt-to-income ratio is 0.40 ($2000/$5,000), or 40%.

Ideally, banks like to see a debt-to-income ratio lower than 43%. As a result, it's best to calculate your ratio and, if necessary, adjust your spending, pay down debt, or increase your income to bring down your ratio.

4. Set Your Sights on a Less-Expensive Property

If you can't qualify for the mortgage amount you want and you aren't willing to wait, you could choose a smaller home with fewer bedrooms, bathrooms, or square footage. A home in a more distant neighborhood may also provide you with more affordable options.

If necessary, you could even move to a different part of the country where the cost of homeownership is lower. When your financial situation improves over time, you might be able to trade up to your ideal property, neighborhood, or city.

5. Ask the Lender for an Exception

Believe it or not, asking the lender to send your file to someone else within the company for a second opinion on a rejected loan application is possible. In asking for an exception, you'll need to have a very good reason, and you'll need to write a carefully worded letter defending your case.

If you have a one-time event—such as a charged-off account—impacting your credit, explain why the incident was a one-time event and that it will never occur again. For example, a one-time event could be due to unexpected medical expenses, natural disasters, divorce, or a death in the family (the blemish on your record will actually need to have been a one-time event). Also, you'll need to be able to back your story up with an otherwise solid credit history.

6. Consider Other Lenders and FHA Loans

Banks don't all have the same credit requirements for a mortgage. For example, a large bank that doesn't underwrite many mortgage loans will likely operate differently than a mortgage company that specializes in home loans. Local banks and community banks are also great options. The key is to ask many questions regarding their requirements; from there, you can assess which financial institution is right for you. Just remember, banks can't discourage you from applying. (It's illegal for them to do so.)

In other words, one lender may say no, while another may say yes. However, if every lender rejects you for the same reason, you'll know it's not the lender, and you'll need to correct any issues holding you back.

Some banks have programs for low-to-moderate-income borrowers, which might be part of the FHA loan program. An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), which means the FHA reduces banks' risk of issuing mortgage loans. The advantage of FHA loans is that they require lower down payments and credit scores than most traditional mortgage loans.

The Bottom Line

If you're concerned about getting approved for a mortgage, following these six steps can get you on track to getting approved. Also, be sure to ask your lender what else you can do to get approved. When you know what lenders look for, you can arrange your financial situation to meet their lending requirements.