Whether you’re self-employed or traditionally employed, securing a higher mortgage approval can be a game-changer in achieving your dream of homeownership. However, lenders evaluate various factors to determine how much mortgage you qualify for, and understanding these criteria can help you optimize your approval amount.
In this article, we’ll explore actionable tips for both self-employed and traditionally employed individuals to increase their mortgage approval amount while staying within financial comfort.
Factors That Determine Mortgage Approval Amount
Lenders assess several key factors to decide how much mortgage they’re willing to approve. These include:
- Income: Your earnings (whether salaried or self-employed) demonstrate your ability to repay the loan.
- Debt-to-Income Ratio (DTI): Lenders compare your monthly debt obligations to your income. Lower ratios improve your chances.
- Credit Score: A higher credit score can qualify you for better rates and terms, increasing affordability.
- Down Payment: A larger down payment can reduce the amount you need to borrow, potentially boosting approval chances.
- Employment History: Stable employment reassures lenders of your financial stability.
Tips for Self-Employed Borrowers
Self-employed individuals face unique challenges in mortgage approval, as lenders require extra proof of consistent income. Here’s how to strengthen your case:
1. Organize Your Financial Documents
Prepare your tax returns, bank statements, and proof of business income for the last two to three years. Lenders need to see consistent earnings over time.
2. Separate Personal and Business Finances
Keep your personal and business accounts separate to clearly demonstrate your income and expenses.
3. Increase Your Declared Income
If possible, reduce the deductions on your tax returns to show a higher taxable income. While this might increase your taxes, it strengthens your mortgage application.
4. Build a Larger Down Payment
A significant down payment reduces the lender’s risk and makes you a more appealing borrower.
5. Consider a Co-Signer
If your income is deemed insufficient, adding a co-signer with a stable income can increase your approval amount.
Tips for Traditionally Employed Borrowers
For those with regular employment, here’s how to optimize your mortgage approval amount:
1. Pay Down Existing Debt
Reducing your credit card balances, loans, or other debts lowers your debt-to-income ratio, freeing up more room for mortgage payments.
2. Increase Your Credit Score
Paying bills on time, keeping credit utilization low, and avoiding new debt inquiries can boost your score, qualifying you for better rates.
3. Save for a Bigger Down Payment
A larger down payment reduces the loan amount required, potentially increasing your approval.
4. Improve Your Income
If possible, negotiate a raise at work or take on a side hustle to boost your earnings and show additional income.
5. Opt for a Longer Amortization Period
Choosing a longer repayment period lowers monthly payments, which can increase the amount you’re approved for.
General Tips for All Borrowers
Whether you’re self-employed or traditionally employed, these strategies can help maximize your mortgage approval amount:
1. Shop Around for Lenders
Different lenders have different criteria and products. Mortgage brokers can help you find lenders that specialize in your circumstances, including self-employment.
2. Reduce Monthly Obligations
Cutting back on non-essential expenses, such as subscriptions or personal loans, can improve your debt-to-income ratio.
3. Use a Co-Borrower
If you’re buying with a partner, combining incomes can increase the amount you qualify for.
4. Build a Solid Financial Track Record
Lenders appreciate borrowers who demonstrate stability and responsibility through consistent savings, timely bill payments, and low debt levels.
5. Get Pre-Approved
A pre-approval not only gives you an idea of how much you can borrow but also shows sellers that you’re a serious buyer.
Common Mistakes to Avoid
- Ignoring Credit History: Late payments or maxing out credit cards can hurt your approval chances.
- Overextending Yourself: Borrowing more than you can comfortably afford may lead to financial strain.
- Making Large Purchases: Avoid big-ticket purchases before applying, as they can increase your debt load.
Final Thoughts
Getting a higher mortgage approval amount requires careful planning, whether you’re self-employed or traditionally employed. By understanding the factors lenders consider, organizing your finances, and implementing strategies to reduce risk, you can position yourself as a strong candidate for a larger loan.
Ready to explore your mortgage options? Contact The Local Broker for personalized advice and expert guidance tailored to your needs.
