6 Steps to increase your mortgage pre-approval amount

When you're taking out a mortgage to buy a house, you want to know you've done everything possible to get the best deal. Part of that is securing pre-approval for a mortgage.

A mortgage pre-approval is a letter from a lender that says you qualify for financing up to a certain amount based on your financial standing.

Naturally, the more you qualify for, the more appealing your offer will be to the seller.

So, if you're wondering, "How can I increase my mortgage pre-approval?" read on to learn the six tips that will help you get the best possible deal.

Reduce Your Debt

Even with a decent credit score, a high debt-to-income (DTI) ratio can prevent you from qualifying for your desired mortgage. Your DTI is calculated by dividing your total monthly debt payments by your gross monthly income.

DTIs 36% or lower are good, while 43% or more are considered high-risk by most lenders.

In general, it's best to pay off credit card debt first, then loan debt, because credit cards have higher interest rates.

When analyzing your credit score, mortgage lenders consider two things: how much credit repayments add to your DTI, and your credit utilization rate—i.e., the percentage of the available credit you are using.

For example, if you have two credit cards, each with a $30,000 limit, the maximum amount of credit card debt you could have would be $60,000.

Having a $15,000 balance on each card means you have a 50% utilization rate. To get the best possible mortgage rate, you should keep your DTI ratio below 36% and your credit card utilization rate at 30% or below.

Increase your down payment

First-time homebuyers on average pay down 13%, according to Realtor.

Conventional loans can require as little as 3%, while Federal Housing Administration (FHA) loans can be as low as 3.5%.

But just because you can put down less doesn't necessarily mean it's better.

If you up your down payment, you often can get better terms—as well as the opportunity to avoid having to pay private mortgage insurance (PMI).

What's the optimal down payment?

20% is the gold standard because it cushions lenders from potential default—although not everyone can afford to put that much down.

If more than 80% of your property is financed, lenders will charge PMI to safeguard against default until you have accumulated 20% equity in your home

Boost Your Income

In an ideal world, you'd instantly be able to grow your income to increase how much you can borrow. But that's not something you can usually do quickly.

Luckily, you don't necessarily have to find a higher-paying job to raise your mortgage pre-approval rates.

Lenders also consider rental income, disability or veteran's benefits, child support, alimony, pension income, interest on investments, and part-time or side business revenue when reviewing financial stability.

For example, let's say you have a yearly base income of $80,000, a rental income of $15,000, and receive $5,000 interest on investments; your total income would be $100,000. This could increase your loan approval amount by at least 15%.

Shop around

There are many different types of mortgages. Each has specific requirements, so research your options to find the most suitable option for your home-buying goals.

Fixed-rate mortgages are the most common, allowing borrowers to pay the same interest rate over the length of the loan. This is an appealing option for borrowers who want stability in their mortgage payments.

Adjustable rate mortgages (ARMs) have interest rates that fluctuate over the loan, making it a riskier option. For example, since 1971, historic mortgage rates have skyrocketed to above 18% and plummeted below 3%.

Other mortgage types include jumbo mortgages for expensive homes, Veterans Affairs (VA) mortgages for military members, and Federal Housing Administration (FHA) mortgages for those with lower credit scores.

Consider a co-borrower

Another way to increase your mortgage approval rate is to add a co-borrower, such as a spouse, parent, family member, or friend, to make you look more desirable to lenders.

They share the liability of the loan and, along with you, are responsible for the repayment. A co-borrower can help you secure a loan if you don't have enough for a down payment and get you qualified for a larger loan or lower interest rate.

For example, if you apply for a $400,000 loan with a credit score of 650, you might be approved for a mortgage but will need to put down 20%.

If you add a co-borrower with a credit score of 770, you might only need to put 10% down saving you $40,000 in upfront costs.

Be mindful—co-borrowers bring both their liabilities and their assets. If they have a lot of debt or bad credit, including them in your application could hurt rather than help you.

Opt for a longer loan term

By extending the loan term, your lender may offer a larger initial approval amount for your mortgage. This is because the loan is spread out over more payments.

Even though you could end up paying more in the long run, lenders view smaller monthly payments as more manageable. Therefore, you can afford more than what would have been possible with a shorter-term loan.

For example, if you are looking for a $200,000 mortgage with a 7.5% interest rate, the monthly payment for a 15-year loan would be $1,639.51, while the monthly payment for a 30-year loan would be $1,335.50.