According to a new Bankrate survey, 50% of Americans who have applied for financing have been denied, with 17% being denied multiple times. Of these denied applicants, 82% claim their lack of access to credit has hurt their finances.
This alarming denial rate started rising when the Federal Reserve began raising interest rates in March 2022. With rates still elevated, many borrowers have given up hope of obtaining financing–around 15% of Americans haven’t applied for the credit they need since they assume they’ll be rejected.
Raising loan approval rates is important for borrowers and mortgage lenders alike. One way to move the needle is by offering helpful education on mortgage readiness. Below, we provide seven tips to help mortgage applicants improve their eligibility so they can boost their chances of getting approved.
Table of Contents
#1 Understand Your Credit Score
Credit scores are a crucial element of mortgage eligibility. Most lenders require a credit score of 620 or above, though some loan programs are more lenient than others. Unfortunately, obtaining credit has only become more challenging for applicants with low credit scores in recent years. While 21% of all Bankrate survey respondents claim it’s become harder to access credit, that figure jumps to 50% of applicants with “poor” credit scores and 38% with “fair” credit scores.
If you suspect that your credit score contributed to your loan’s denial, you need to determine what aspect of it needs improvement. FICO credit scores weigh the following factors according to these percentages:
- 35% – Payment history (how consistently you make your credit payments on time)
- 30% – Amounts owed (how much money you’ve borrowed from your available credit)
- 15% – Length of credit history (the average age of your open credit accounts)
- 10% – Credit mix (the variety of credit accounts you’ve used)
- 10% – New credit (how many credit accounts you’ve applied for in the past few months)
By understanding these factors, you can determine which ones need the most improvement and optimize them accordingly. For example, if you’re late on payments, make them up as soon as you can, or if you’re using more than 30% of your available credit limit, pay down your credit card balances.
Learn More: How to Improve Your Credit Score
#2 Closely Review Your Credit Reports
Your credit score is calculated using the information contained in your credit reports. Mortgage lenders typically pull tri-merge credit reports, which compile information from all three national credit bureaus–Experian, Equifax, and TransUnion.
If your credit reports include any outdated or inaccurate information, they may be skewing your credit score in the wrong direction. Thus, it’s a good idea to review them before applying for your mortgage. You can obtain copies of your three credit reports for free once every 12 months on AnnualCreditReport.com and review them for accuracy. If you discover any errors, file a dispute with the credit bureau and make sure it’s resolved before applying for your mortgage.
#3 Pay Down Your Debt
Another factor mortgage lenders carefully consider is your debt-to-income (DTI) ratio. This ratio compares your total monthly recurring debt to your gross monthly income. Most lenders only accept applicants who have DTIs below 36%, since it indicates that they’re not saddled with excessive debt payments.
If your DTI is too high, you can improve it over time by paying down your debts strategically. Some tried-and-true tactics include:
- The snowball method – The snowball method has you repay your debt balances in full, one by one, starting with the smallest balance first.
- The avalanche method – The avalanche method has you repay your debt balances in order of their interest rates, starting with the highest interest rate debt first.
- Credit counseling – If your debt has become overwhelming, you may want to consider credit counseling. Your credit counselor can coach you along your debt repayment journey and help you break the financial habits that got you into excessive debt in the first place.
You should also be mindful of your DTI even after you get approved for your mortgage. Until your loan closes, a spike in your DTI could impact your mortgage eligibility. As a result, you should avoid taking out an auto loan or maxing out your credit cards during the underwriting process.
Learn More: Understanding Debt-to-Income Ratios’ Impact on Mortgage Approval
#4 Scrutinize The Stability of Your Employment
When you apply for a mortgage, your lender will carefully evaluate your employment situation. Lenders want applicants who have held steady jobs for at least two years. Not only should your employment be stable, but it should produce an income that’s remained the same or trended upwards over time.
If your last two years of work don’t satisfy these requirements, you may need to hold off on your home purchase until you can establish a more reliable employment history.
#5 Find Ways to Earn More Money
Like your employment history, mortgage lenders will want to verify your past two years of income. They want to make sure you can afford your mortgage payments for the foreseeable future.
To qualify, your income must be reliable and verifiable via tax returns, W-2s, or pay stubs. Due to these requirements, you can run into complications if you:
- Are recently self-employed
- Subsidize your primary income with a second job or side hustle
- Earn a variable amount month-to-month
- Get paid in cash and don’t reliably report it to the IRS
While these non-traditional forms of income may not always qualify for your mortgage (and therefore, your DTI calculation), they can enhance your mortgage eligibility in other ways. For example, taking up a side hustle may help you pay down your debt faster than you could otherwise.
Learn More: How to Qualify Mortgage Applicants’ Secondary Income and Employment (Part 1)
#5 Exercise Caution When Authorizing Hard Credit Checks
Any time you apply for a new credit card or loan, your lender must conduct a hard inquiry into your credit reports. Hard credit checks can bring down your credit score temporarily, since they negatively influence the “New Credit” factor of your FICO credit score.
With this in mind, you should only authorize hard credit checks when it’s truly necessary. You can preserve your credit score in the meantime by:
- Getting prequalified with different lenders – If you’re interested in taking out a new loan or credit card, you may be curious about different lenders’ offerings. Shopping around is an excellent way to find the best lender for your situation, but you don’t need to formally apply with each one. Simply apply for prequalification instead. Getting prequalified gives you an idea of the estimated loan offers you’ll qualify for from each lender, enabling you to narrow down your top choices. The best part? Prequalification only requires a soft credit check, so your credit score won’t be impacted.
- Complete all of your formal applications within a 45-day period – Once you’re ready to formally apply for a mortgage, submit all of your applications within 45 days. Doing so will make it so your multiple hard credit checks are counted as one on your credit reports, minimizing their impact on your credit score.
#6 Apply With a Creditworthy Cosigner
So far, the steps we’ve discussed can take some time to yield results. If you want to boost your chances of mortgage approval right away, consider adding a cosigner or co-borrower to your application.
- Cosigner: A cosigner is someone who agrees to take on the responsibility of your mortgage payments if you are unable to, such as a parent or close friend.
- Co-borrower: As a fellow primary borrower, a co-borrower is someone who shares equal rights and responsibilities for your joint loan.
In order for your cosigner or co-borrower to enhance your odds of approval, they must possess the qualities lenders are looking for, such as a good credit score, high income, and low DTI. If they do, they may also help you qualify for a larger loan, a lower interest rate, or better terms.
Just keep in mind that your cosigner or co-borrower also bears liability for your missed payments, so you must choose someone you trust and take great care to preserve their credit score while they’re listed on your loan.
#7 Reduce Your Mortgage Loan Amount
Along with your creditworthiness and financial stability, the size of the loan you’re seeking can also sway lenders. As a general rule, larger mortgage loans are harder to qualify than smaller ones, since your lender is putting more money on the line.
As an aspiring homebuyer, you can lower your loan amount by:
- Searching for homes at a lower price point
- Saving up for a larger down payment
- Asking your lender about down payment assistance programs
Note: If you can afford to put more than 20% down, you’ll get the added benefit of forgoing many loan program’s private mortgage insurance (PMI) requirements.
Boost Your Mortgage Readiness Today With Certified Credit
While loan approvals appear to be in short supply these days, don’t get discouraged. By following the seven tips above, you can help your potential borrower become a more attractive applicant and finally break through the financing barriers keeping them from their dream of homeownership.
For more educational content about mortgage lending and the home-buying process, check out the Certified Credit blog!
Are you a mortgage lender? Share this article with your applicants to help them improve their mortgage readiness and nurture them through your lending pipeline.
