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With home prices on the rise, you might want or need a bigger mortgage. Now can be a great time to apply for a larger loan, with rates still relatively low for jumbo mortgages and other types of loans. If you need more borrowing power, these eight strategies could help.
1. Show more income
More earnings could help you land a bigger loan, but that doesn’t mean you have to get a much higher-paying job or snag a raise. In addition to salary or wages, you might be able to use other sources of reliable income to qualify, such as:
- Interest or dividends from investments
- Income from rental property
- Alimony or child support
- Money earned from a part-time job or side business (provided you’ve earned the income for at least the past two years)
Denise Supplee, for example — co-founder of Spark Rental, a website for rental property investors — needed more income to refinance, and thought of her live-in mother.
“Starting a new business and having half the income I did when we purchased the home, I knew refinancing was going to be challenging,” says Supplee, who is also a Realtor based in Pennsylvania.
“Originally, my mother was not on the loan, nor did we have her pay any of the expenses,” explains Supplee. “However, in the refinancing, I asked our loan officer if we could use her Social Security income to get the job done.”
2. Pay off other debt
When you apply for a mortgage, the lender looks at your debt-to-income (DTI) ratio, which is the percentage of your monthly income you’re shelling out for your minimum monthly debt payments. Generally, a DTI ratio of 36 percent or less is considered ideal and can help you qualify for a larger loan. Several lenders are comfortable with even higher DTIs.
Paying off a credit card or installment loan can make a huge difference in this figure, explains Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate in San Francisco, California.
“Often, I will see on someone’s credit a debt with a $2,000 balance and $300 monthly payment,” Beeston says. “Paying that off is a quick and easy way to increase how much you qualify for.”
3. Raise your credit score
A higher credit score helps you obtain not only a lower interest rate but also a slightly larger loan, in many cases.
“Having a higher credit score may allow you to qualify for a higher mortgage [amount], but only to a certain extent,” says Matt Hackett, operations manager at Equity Now, a New York-based mortgage lender.
To boost your score, be sure to make all your payments on time, and don’t max out the credit you have or apply for more credit while you’re trying to get the mortgage.
4. Put at least 20 percent down
If you’re buying a home and your down payment is at least 20 percent of the home’s price, you won’t have to pay for private mortgage insurance (PMI), so you might be able to get a bigger loan. PMI, which protects the lender if you stop paying your loan, becomes part of your monthly payment and can decrease the size of the loan you’re eligible for.
If you still have cash available after you make a 20 percent down payment, you could pay your lender more upfront to buy down your interest rate.
“Not only will you qualify for a higher loan amount, but you will save thousands of dollars over time, too,” says Casey Fleming, a mortgage advisor at C2 Financial Corp. in San Jose, California.
5. Apply for a 7/1 ARM, FHA or VA loan
A hybrid loan, such as a 7/1 adjustable-rate mortgage (ARM), could enable you to borrow more than you would with a 30-year, fixed-rate loan. A 7/1 ARM offers a fixed rate for the first seven years. After that, the rate changes.
If you feel comfortable with the rate risk of an ARM, or if you plan to sell your home or refinance your mortgage before the seven-year mark, this option could help you get a lower interest rate and a bigger mortgage.
The initial rate for an arm is usually 0.325 to 0.625 of a percentage point lower than for a conventional 30-year fixed-rate loan, Fleming says.
Two other options: FHA loans, which are insured by the Federal Housing Administration, and VA loans, which are guaranteed by the U.S. Department of Veterans Affairs, have more flexible guidelines that could allow you to borrow more.
6. Add a co-borrower
Adding a co-borrower to your mortgage, especially if the co-borrower has strong credit and a steady income, might help convince a lender to offer you a larger loan. The co-borrower’s income, coupled with your own, increases the total income the lender can use to qualify you for a loan.
For example, if you make $50,000 per year, there’s a limit to the amount you can pay toward a mortgage each month, and therefore a limit to how much a lender will approve you for. Adding a co-borrower who also makes $50,000 per year increases that ceiling, so you can better afford a larger loan.
7. Build cash reserves
While you won’t necessarily need cash reserves to qualify for a mortgage, having additional assets in the bank or elsewhere can help you qualify for a bigger loan. If you have some funds stashed away, you’ll be able to weather an unexpected expense and continue to make your mortgage payments. If not, one emergency could cause you to fall behind, and make a lender less comfortable offering you more.
8. Get more than one quote
It’s always a good idea to get multiple rate quotes and loan offers — in fact, studies show comparison-shopping pays off over the course of a loan.
There’s another benefit, too, however: If you get multiple preapprovals, you’ll get multiple offers with potentially different amounts. If you really need a big mortgage, you can go with the lender that offers the largest preapproved loan.
With more than one offer, you also have the leverage to go back to a lender that preapproved you for a smaller amount and see if they’ll increase the amount they’re willing to lend. This can help you get the biggest mortgage for the lowest cost.
With additional reporting by TJ Porter