How to get approved for a higher mortgage loan

For many, the American Dream means owning a home in a beautiful, safe neighborhood. Realizing this dream, however, isn’t always straightforward.

Unless you have a rich uncle who left you a generous inheritance, you’ll probably need to borrow money to buy a house. And lenders, obviously, won’t just give you any amount you ask for.

Instead, they are going to scrutinize your financial health from top to bottom to determine how much you can borrow.

Over the next few minutes, this article will explain what lenders look for when determining loan values. By the end, you’ll be armed with the steps you can take to help secure a higher mortgage and eliminate chance from the equation.

Ways to get approved for a higher mortgage

Here's the ultimate checklist of things to do to improve your finances and make a more favorable impression on lenders.

Take on a side hustle before applying

Let's start with the most obvious one: The more money you make, the more a bank will loan you. One of the most straightforward methods to securing a higher mortgage loan is to land a higher-paying job.

Fortunately, you don’t have to quit your current job to increase you income.

Instead, consider taking on additional part-time work. This can be as simple as selling pies at the farmer's market on Sunday or driving for Lyft on your days off.

Keep in mind, however, that you must be able to verify this income for the bank to consider it in their decision. Simply showing up with an envelope full of cash won't do it.

Banks want to see a clear and consistent pattern of income generation.

While this option is very effective, it’s not necessarily fast. You may need to earn additional income for up to a year before a bank will take it into account. This will give that extra income time to work through an annual tax return, legitimizing the revenue.

Lower your debt-to-income ratio

Banks will be apprehensive about providing you with a large loan if you hold a lot of debt relative to your income.

The solution? Pay down existing debts.

Focus your efforts toward paying down your most expensive debt. That is, put the most money each month toward debts with the highest interest rates. This approach is commonly referred to as the Debt Avalanche Method.

But don’t just blindly throw money at your debt. First see if there are ways you can lower it altogether. For example, consider whether refinancing or consolidating existing debts can help reduce your payments and lower your interest rates.

Besides taking bites out of your existing debt, refrain from taking on any new loans or credit card debt.

Improve your credit score

One of the most important factors affecting your mortgage value is your credit score. Typically, the better your credit score, the higher the loan amount a lender will be willing to provide.

Here are some of the most common ways you can positively impact your score:

• Pay all your bills on time: If helpful, consider setting up monthly reminders the day before they are due. Even better, if the option exists, set up automatic payments to have all your bills paid directly each month.
• Reduce your credit utilization ratio: Credit utilization is the ratio your credit card balance represents compared to its limit. A card with a $500 balance and a $1,000 limit has a credit utilization ratio of 50% ($500 / $1,000). Low credit utilization rates are seen favorably by lenders. All else equal, banks would prefer a customer with a $5,000 credit card balance on a card with a $15,000 limit to a customer with a $500 credit card balance with a $1,000 limit. The first scenario has a lower ratio of 33% versus the latter at 50%.
• Keep old accounts active: Lenders prefer borrowers with long track records. Avoid closing old or unused credit accounts, as they can help your score while remaining open.
• Limit new credit inquiries: Applying for credit requires a hard inquiry. These hard inquiries can temporarily lower your score. Limit inquiries as much as possible.
• Seek credit counseling: Working with a reputable credit counseling agency can effectively improve your credit health. Agencies can provide an optimal path for reducing debt and, ultimately, improving your credit.
• Become an authorized user: If a family member has good credit, becoming an authorized user on their account can help improve your score.
• Maintain a mix of credit types: Lenders prefer to see diverse credit types in your history (i.e., credit cards, auto loans, personal loans, etc.).

Consider other loan types

Check to see if you’re eligible for other types of loans, like a Federal Housing Administration (FHA) loan, Veterans Affairs (VA) loan, or United States Department of Agriculture (USDA) loan. In some cases, these lenders may have more flexible approval criteria that can lead to being approved for a larger loan.

Shop around

As with most things in life, shopping around is essential. When discussing something as big as a home purchase, shopping around becomes all the more important.

As a result, check with multiple lenders to see which offers the most favorable rates and terms combined with the highest loan amount.

Don’t skimp on documentation

Lenders decide how much to lend based on the official documentation you provide. It’s not enough to tell them your income; you need to prove it.

It’s important to fully document all income, assets, and employment. Don’t leave anything to chance. Gather the documents you need, keep them organized, and make copies. You want to impart a clear financial picture to potential lenders.

Is a higher loan amount prudent?

While a bigger loan can be the difference between securing your dream home and losing it to a higher bidder, it comes with a cost.

The larger your mortgage, the higher your monthly payment. Before maximizing your loan, ensure you're prepared financially and mentally for the burden.

And just because you’re preapproved for a higher mortgage doesn’t mean you need to use the full amount. It’s far better to have the option available and not use it than to need the additional financing and not have it.