How to Increase Your Chances of Getting Approved for a Home Loan
Whether you’re buying your first home or refinancing, managing your finances carefully is important for getting approved for a home loan. Read on to get actionable tips that can improve your chances of securing the loan you want.
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You’ve saved for the down payment, your credit score is solid and you’re well on your way to buying or refinancing a home. It's an exciting step forward, but your loan isn’t finalized until it’s fully approved. Throughout the entire process — from pre-approval to processing to closing — there are actions you can take to increase your chances of securing the home loan you want.
Let’s explore some strategies to help you stay on track, maintain financial stability and set yourself up for a successful approval.
The Application Process
The mortgage application is an integral part of the home loan process, whether you’re a first-time homebuyer, a seasoned homeowner purchasing your next home or refinancing. How you manage your finances throughout every phase can influence how smoothly it goes.
After submitting your application, the lender will verify your financial details and may request additional documentation. Once in underwriting, the lender evaluates your financial picture to determine approval. Even if you have been pre-approved, any changes to your financial situation, especially your debt-to-income ratio, may cause delays or complications.
What Is a Debt-to-Income (DTI) Ratio?
Your DTI ratio is the percentage of your monthly gross income that goes toward paying debts. Lenders use this ratio to evaluate your potential ability to manage a mortgage.
For example, if you earn $5,000 per month and have $1,500 in monthly debt payments, your DTI ratio would be 30% ($1,500 ÷ $5,000).
A lower DTI ratio suggests you’re in a stronger financial position to take on new debt, making you more likely to be approved for a loan. Higher ratios can make approval more difficult. A favorable DTI may also help you secure better loan terms and lower interest rates.
So how do you help ensure your DTI ratio is in the best position for your desired home loan? Let’s break it down.
Tips to Set Yourself Up for Home Loan Approval Success
Whether you’re in the pre-approval stage or preparing to close, how you manage your finances impacts your DTI and, ultimately, your home loan approval. The following tips can help you make smart financial decisions throughout the process and improve your chances of securing the loan you need.
Limit Large Purchases
Try to avoid making large purchases that require loans or credit card financing. Incurring more debt can increase your debt-to-income (DTI) ratio and reduce your savings reserve, both of which can affect your mortgage approval chances. Lenders may check your credit and financial status multiple times throughout the process, so keeping your finances stable is key.
Maintain Job and Income Consistency
Lenders value job stability and consistent income when reviewing your application. It’s best to avoid changing jobs, switching to commission-based pay or having gaps in employment during the mortgage process. Any changes could raise concerns for underwriters and potentially delay or impact your approval.
Tip: If you experience any employment changes during the mortgage process, inform your lender early and be ready to provide documentation, like offer letters or recent pay stubs. If you lose your job, your lender may be able to discuss alternative options, such as extending the process or exploring other loan programs. While there is no guarantee of approval, transparency is important.
Think Carefully Before Applying for New Credit
Hold off on applying for new credit cards, auto loans or any other forms of credit while you’re in the process of securing a mortgage. New credit inquiries, accounts and debt can impact your credit score and increase your DTI ratio, making you appear more risky to lenders. Taking on significant new debt can also lead to delays in loan processing or, in some cases, disqualification.
Tip: If a new loan is absolutely necessary, consult with your lender as soon as possible before applying for credit. While it could still impact your approval, they can guide you through the process, help you understand the potential effects and explore available options.
Keep Existing Credit Accounts Open
Closing unused credit accounts may seem like a good idea, but doing so can actually lower your available credit and increase your credit utilization ratio. This can negatively affect your credit score. Keeping your credit accounts open helps maintain a strong, established credit history — something that works in your favor during the loan approval process.
Tip: If you’re concerned about managing unused accounts, consider requesting a lower credit limit rather than closing the account. This helps reduce the temptation to overspend while preserving your available credit and credit history.
Stay on Track with Payments
Be sure to continue making timely payments on all your monthly obligations — credit cards, loans, utilities, etc. Payment consistency helps maintain your credit score and demonstrates financial responsibility to lenders.
Tip: Set up automatic payments or reminders for your monthly bills.
Maintain Healthy Financial Habits
Keep an eye on your spending, stick to a reasonable budget and keep saving. Even if you already have a solid down payment, you’ll still need funds for closing, future home expenses and the unexpected.
Tip: Monitor your spending with budgeting apps or tools to stay on top of your financial goals.
Be Cautious When Considering Cosigning
Cosigning a loan for someone else can add financial obligations to your plate, even if you're not the primary borrower. Lenders will factor in these obligations when making their decision, so it’s a good idea to avoid cosigning any new loans during the mortgage process.
Tip: Before cosigning a loan, consult with your lender on how it might impact your debt-to-income ratio and financial flexibility. If possible, delay cosigning until after your mortgage has closed to keep your application in the best possible shape.
Embrace Stability (for Now)
A new home or an exciting renovation may be on the horizon, but for now, embrace stability. Lenders value consistency in your financial life. Major money moves, like transferring large sums between accounts or making unusual transactions, can potentially raise red flags during underwriting.
Tip: If you need to make a financial change, be proactive and communicate with your lender. Transparency can help keep the process on track.
Plan, Prepare and Get Support with Pennymac
With the right steps and a stable financial plan, you’re well on your way to securing the home loan you want. Ready to move forward? Connect with a Pennymac Loan Expert today.
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Meet Our Contributing Editors
Bradley Thompson and Afton Lambert are Contributing Editors for Pennymac’s consumer content and are exemplary leaders within the mortgage industry space. Both experts take pride in helping our customers achieve and sustain their aspirations of home.
For over 13 years, Bradley has achieved success as a high performer in various leadership roles including consumer direct sales and mortgage fulfillment positions.
With over 10 years of mortgage experience, Afton started her career as a top performing Loan Officer, before transitioning into her leadership role, where she has recruited, hired and trained Loan Officers.