How to increase the mortgage you qualify for

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

There are multiple factors that determine the mortgage you can afford including your debt-to-income ratio, credit score and loan terms. Below we explain the steps you can take to increase the mortgage you qualify for.

Reduce your monthly debt payments

Perhaps the best way to increase the mortgage you can afford is to lower your monthly debt expense for items such as credit cards and car, personal and student loans.

Lenders apply a maximum debt-to-income ratio that effectively limits how much of your monthly income you can spend on your mortgage payment, property tax, homeowners insurance and other monthly debt expense. The lower your personal debt payments, the more money you can spend on your mortgage payment and the higher the loan amount you qualify for.

As an example, if an applicant with $5,000 in monthly income and $750 in monthly debt reduces their debt by $350, the mortgage amount they can afford increases by approximately $58,000, assuming a 30 year fixed rate loan with a 4.000% interest rate.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford

Increase your monthly income

Another way to increase the mortgage you qualify for is to increase your monthly gross income. In short, the higher your income, the higher the mortgage amount you can afford.

In simple terms, if two applicants have the same monthly debt, the applicant with the higher income can qualify for a higher loan amount. While an increase in your income provides less benefit than the same decrease in your monthly debt, it can still boost the mortgage you qualify for.

Select a lower mortgage rate

Finding the lowest mortgage rate not only saves you money but increases the loan you can afford. For example, reducing your rate by only 0.250% can have a significant impact on the mortgage you qualify for.

The table below compares mortgage rates and monthly payments for leading lenders in your area. As the table demonstrates, a small difference in rates results in a significant difference in monthly payment. We recommend that you shop multiple lenders in the table below to find the lowest rate.

Improve your credit score

With a standard conventional loan program, applicants with a higher credit score typically pay a lower mortgage. The lower your rate, the higher the mortgage you can afford.

You typically need a credit score of 700 to 740 to be eligible for a lender’s best mortgage terms including the lowest interest rate and fees. So if you are relatively close to that range you should consider taking steps to increase your score.

Everyone’s credit profile is unique and it can take time to improve your score but reducing your credit utilization, closing debt accounts if you have too many open and addressing open credit issues such as delinquencies are all positive steps.

Select a 30 year mortgage

In short, the longer your mortgage, the lower your monthly payment and the higher the loan amount you can afford. This is why most borrowers choose a loan with a 30 year term.

For example, the mortgage you qualify for with a 30 year loan can be tens or hundreds of thousands of dollars higher than the loan you can afford with a 15 year loan. You pay more interest expense with a longer mortgage but you also maximize your loan amount.

Consider an adjustable rate or interest only mortgage

The initial interest rate and monthly payment for an adjustable rate mortgage (ARM) or interest only loan are usually lower than for a comparable fixed rate mortgage. The lower rate and payment may enable you to qualify for a higher mortgage amount.

ARMs and interest only mortgages involve more risk than a fixed rate loan because your payment may increase suddenly and significantly depending on the terms of the loan. If you are comfortable with this risk and the potentially higher payment then selecting these programs may enable you to qualify for a greater loan amount.

Pay discount points

A discount point is an optional fee equal to 1% of the loan amount that allows you to reduce your mortgage rate. As highlighted above, paying a lower rate increases the mortgage you qualify for.

One discount point generally lowers your mortgage rate by .250% so if a lender charges you a 4.000% rate with no points, your rate should be 3.750% if you pay one point. You can buy multiple discount points or even halves of points.

It is important to highlight that paying discount points increases your closing costs -- for example for a $400,000 mortgage one point costs $4,000. We should also emphasize that the decision to pay points is 100% your choice. If you have the extra funds and plan to own your home for at least five years then paying points may be a good way to increase loan amount.

In closing, there are multiple ways to increase the mortgage you qualify for. We recommend that you review each option to determine the methods that work best for you.

Sources

"B3-6-02, Debt-to-Income Ratios."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.

"Mortgage Rates & Affordability."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.