Buying a house is exciting but hearing that you can’t get approved for a mortgage can be heartbreaking. However, it doesn’t mean there isn’t any hope. There are many reasons why you may not get approved for a mortgage, or not approved for an ideal amount. For many people, the culprit is their outstanding debt.
While there are many reasons you could be rejected for a mortgage, there are also many ways you can improve your application to help you get approved. If your debt is bringing you down on your mortgage application, these are a few things you can do to help get approved.
Firstly, how does debt impact your mortgage application?
When reviewing your mortgage application, lenders look at a little number known as your debt-to-income ratio. Your debt-to-income ratio is an important figure that influences how much a homebuyer can borrow in terms of a mortgage. In short, it is the difference between how much you owe in debt and how much your income is.
A debt-to-income ratio is calculated by dividing a borrower’s debt payments by their gross monthly income. Let’s say you spend $500/month on your car loan, you pay $300/month towards your school loans, and you make $5000 monthly. Your debt-to-income ratio would be 16%.
Let’s break down the math:
($800/$5000) x100 = 16%
The reason why your debt-to-income ratio is reviewed is that lenders need to ensure that the money you borrow for your mortgage will be paid back on time. In many cases, borrowers who have too much outstanding debt are more likely to default on their mortgage loans. In most cases, the maximum debt-to-income ratio a homeowner can have and still be approved for a mortgage is 43%. If your debt-to-income ratio is above this, you need to bring it down in order to get approved for a mortgage.
How to get approved with a mortgage when you have debt
Just because you have debt, doesn’t mean it’s impossible for you to get approved for a mortgage. There are a few different paths you can take to still make your dream of becoming a homeowner a reality:
1. You can pay off your debts
Perhaps the most obvious step to take. Paying off or eliminating your debt completely will greatly impact your chances of getting approved for a mortgage. The lower your debt-to-income ratio, the better. By eliminating as much debt as possible, lenders will see you as less of a risk and will therefore be more likely to approve you for a mortgage.
Paying off your debts can be much easier said than done though. If you have a lot of outstanding debt, it may be worth consolidating your debt before applying for a mortgage. Or you can save by reviewing your monthly expenses and setting a tighter budget for yourself.
2. You can boost your application in other areas
You may not have the greatest debt-to-income ratio, but you can make up for that in other areas of your application. You can spend more time saving for a larger down payment or you can work on increasing your credit score. Yes, this may mean that you need to spend more time preparing your finances before buying a house, but good things come to those who wait.
3. You can get a co-signer
Think of a co-signer as a financial safety net. A co-signer is someone who pledges to pay back a loan if you, the buyer, do not meet your financial obligations. When someone chooses to co-sign for you on a mortgage, they are saying that they trust in you to pay your loan on time each month. If you do not, both you and your co-signer will be impacted financially. So, you must be confident that you are able to pay your mortgage loan on time, every time, and be very careful who you ask to co-sign for you. Typically a co-signer is an extremely close and trusted family member or friend.
Having a co-signer is great if your mortgage application falls short in certain areas. Such as employment history, your credit score, or your debt-to-income ratio. Is it guaranteed to get you approved? Not always, but it’s definitely worth looking into.
4. You can use a guarantor
Similar to a co-signer, a guarantor is someone who helps another person get credit on a mortgage. In other words, they ‘guarantee’ someone else’s mortgage by promising to repay any debt if the buyer defaults on their mortgage payments. However, there are a few key differences between a guarantor and a co-signer.
While a co-signer appears on all mortgage documents and has the same amount of ownership as the buyer, a guarantor does not. A guarantor simply just needs to guarantee that the mortgage payments will be made.
This is a prime option for those seeking a bit of a boost on their mortgage application, without as many of the risks involved with being a co-signer. Although you still need to be mindful of who you choose to sign with you. Asking someone to take on the responsibility of repaying a loan they didn’t directly take out in that size isn’t a small request.
Remember, buying a house is not always a race.
Good things come to those who wait. If your debt is in the way of you getting approved for a mortgage right now, it doesn’t mean you can’t eventually buy a house. Sometimes your best option is to spend some time on improving your finances first, saving more for a down payment, eliminating your debt, and then trying again later. Whether it takes you a few weeks, 6 months, or a couple of years, as long as you keep working at it, you will one day own a house.
If you’d like to learn more and find out what you can do to improve your chances of getting approved for a mortgage, I can help. With my years of experience as a financial advisor and a mortgage broker, I can show you all of your options and help you make the best decision based on your unique situation. You can apply for a mortgage online or you can set up a virtual meeting with me by giving me a call at 705-315-0516. Together we’ll make a plan so you’ll be well on your way to becoming an official homeowner soon as soon as possible.