Buying a house can be stressful. When choosing a home, sometimes your wishlist doesn't align with your budget. How can you qualify for a greater mortgage? Let's dive into that question! 

Lenders will use the following metrics to determine if they will be willing to lend an individual money, and how much money they are willing to lend an individual. These financial metrics are:

1. Your credit score
2. Your debt to income ratio
   
   

These financial metrics play a major role in determining if you qualify for a mortgage, and how much mortgage you qualify for. Let’s briefly discuss each metric in greater detail below, and how improving these metrics can actually help you qualify for a greater mortgage.

Your credit score is essentially your financial reputation. This metric highlights how likely you are to pay back the debt (or credit) you have. Various considerations make up a credit score, including; your bill-paying history, the number of loans you have, how long you’ve had a loan open for, your total outstanding unpaid debt, and your collections history, or lack of collections history. 

A credit score typically falls within 5 categories:

• 
  Very poor = 300 - 549
• Poor = 550 - 640
• Fair = 641 - 699
• Good = 700- 739 
• Excellent = 740 +
  
  

The higher your score, the better! Additionally, the higher your score, the more comfortable a lender will be with lending you money. If you have a bad credit score, increasing it before securing a mortgage can help you qualify for more money on your mortgage.

If you’re curious how you can increase your credit score, the following bullets are some of the most basic, yet impactful, ways to do so!

• First and foremost, request a free credit report from one of the credit reporting agencies. This will show you what items are negatively impacting your credit. If you identify any item that is negatively impacting your credit that you disagree with (for example, a bill is in collections, but you clearly remember paying the bill or recall cancelling your agreement with the company who is issuing you the bill), you can work with a credit repair specialist to dispute this claim. Disputing the issue will require proof on your end, but can immediately boost your credit score.
  
  
• Keep your revolving debt, such as credit cards, under 30% of the credit limit. For example, if your credit card has a $10,000 credit limit, do not exceed $3,000.
  
  
• Pay your bills 3 days before the “closing date” of any given statement. This shows the bank/lender you are proactive with your finances, which always looks good!
  
  
• Do not apply for new accounts, or close existing bank accounts or credit cards.
  
  
• If you have a family member with a long history of perfect credit, see if they can add you to one of their credit cards as an “authorized user.” This will immediately give you years of strong credit, and can certainly help elevate your credit score. 
  

The other variable that will play a key role in determining if you qualify for a mortgage, and how much mortgage you qualify for, is your debt to income ratio. This is a simple financial ratio that simply divides your total monthly debt obligation by your total income. 

For example, if your monthly income is $10,000 and your total monthly debt obligation is $5,000, your debt to income ratio is 50%. If your income is $10,000, and your monthly debt obligation is $2,000, your debt to income ratio is 20%. 

What is considered debt? Debt and bills are not the same. Debt is something that you are obligated to pay, no matter what, based on a former agreement. A bill, such as your Hulu subscription, can be canceled at any time. 

Debt comes in all shapes and sizes. Common debt obligations include:

• Student loans
• Car payments (either a lease or finance agreement) 
• Credit card debt
• An existing mortgage 
• Financing of any kind (for example, you’re financing central AC in your home) 

There are various types of mortgages you can qualify for, and each mortgage has its own set of rules around one’s debt to income. However, the one common denominator is, rarely will you ever find a lender who will lend someone money that has a debt to income ratio greater than 50%. 

If you’re looking to buy a home, do all you can to reduce your debt to income ratio! The lower your debt to income ratio is, the more money you’ll qualify to borrow. Pay off outstanding debt if you have the cash, or put a larger down payment down on your new mortgage. It may be uncomfortable parting with the cash, but it can help bring more of that wish list within reach.

Having over a decade of experience in the industry, I can tell you first hand the best way to purchase a home is to prepare for it. Work on improving your credit score and reducing your debt to income ratio. These two financial metrics play a key role in determining IF you qualify for a mortgage, and how much mortgage you qualify for. Please contact me with any questions! 

Michael Mccarthy

Mikemccarthy@leaderbank.com

NMLS #449250