Applying for a mortgage isn’t a guarantee that you will be approved, especially if it is your first loan. There are some things that you can do to help improve your chances of being approved for a home loan. Be sure to look these over and do what you are able to do before applying for a loan, and you’ll be more likely to be approved for the mortgage.
Know Your Debt Servicing Ratio
The main thing that lenders look at when reviewing a loan application is a person’s debt servicing ratio. This is determined by the amount of your income and the amount of your outstanding debts.
In general, most lenders will approve a loan for a person or couple that has anywhere from 30 to 40% of their income going towards the repayment of their debts. This percentage also includes the potential payment for the loan that the person or couple is applying for. So, the lower the ratio is, the better the chances of being approved are.
Pay Off Existing Debt
To lower the debt servicing ratio, it is a very good idea to pay off as much existing debt as possible. Car loans, personal loans, credit cards, and any loans extended to you already are adding to the ratio. Lowering this ratio dramatically increases your chances of being approved for the home loan. Pay off the accounts with the highest interest rates first, that way you’ll save more money and reduce your outstanding debts faster.
Close Accounts Not In Use
Once you have paid off a debt, close the account. The reason for this is that most lenders still figure in that you owe money each month to this account, usually about 5% of the total that is available for you to borrow per account. Many people are declined from a loan based on this, even though they owed nothing on those accounts. After you are accepted for the loan and purchase your home, you can always re-open those accounts, if you want.
Save More for the Deposit
A good goal to aim for when taking out a home loan is to save at least 20% of the purchase price to put down as the initial deposit for the purchase. The more that you can pay off right away, the less you will need to borrow. If you are able to save more to pay off in the deposit, do it. This will also lower the amount you’ll have to pay each month and similarly lower the amount of interest you’ll pay over the life of the mortgage. This will also help with the debt servicing ratio because you’ll be paying less each month on your loan.