With home prices rising to new heights in much of the United States, you may want or need a bigger mortgage to buy the home you want or refinance your existing home loan.
If you’ve got your eye on a house that’s climbing in value or if you otherwise need more borrowing power, these five strategies could help you qualify for a larger mortgage.
1. Show more income
Higher earnings could land you a bigger loan.
In addition to your salary or wages, you might be able to use other sources of reliable income to qualify. These may include:
- Interest or dividends from investments.
- Income from rental property.
- Alimony or child support.
- Money earned from a part-time job or side business.
Denise Supplee, co-founder of SparkRental, a website for rental property investors, needed more income for her own refi 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.
“Originally, my mother was not on the loan, nor did we have her pay any of the expenses,” she adds. “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, lenders look at your debt-to-income ratio, or DTI, which is the percentage of your monthly income that you’re shelling out for your minimum monthly debt payments.
Generally, a DTI of around 35 percent is considered good and will help you qualify for a larger loan. Some lenders are comfortable with even higher DTIs.
Paying off a credit card or installment loan can make a huge difference, says Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage in Santa Rosa, California.
“Often, I will see on someone’s credit a debt with a $2,000 balance and $300 monthly payment,” she says. “Paying that off is a quick and easy way to increase how much you qualify for.”
Reducing credit card balances by using balance-transfer cards, refinancing an auto loan to lower the payment or consolidating debt into an installment loan also could help.
3. Raise your credit score
A higher credit score helps you land 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, don’t max out the credit you have and don’t apply for more credit while you’re trying to get a home loan.
Get your credit report and credit score for free at myBankrate.
4. Pay at least 20 percent down
If you’re buying a home and your down payment is at least 20 percent of the purchase price, you won’t have to pay for private mortgage insurance, or PMI. So, you might be able to get a bigger loan.
PMI, which protects the lender if you stop paying on 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 adviser at C2 Financial Corp. in San Diego.
5. Apply for a 7/1 ARM, FHA or VA loan
A hybrid loan, such as a 7/1 adjustable-rate mortgage, or ARM, could enable you to borrow more than 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 interest-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, says Fleming.
Also, FHA loans, 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.