Buying a home is rarely easy. A key part of the process—qualifying for a mortgage loan—has become even more challenging in recent weeks. Fortunately, with a strong credit score and some careful preparation, your dream home can still be within reach.
According to the Mortgage Bankers Association, mortgage lenders haven’t been this choosy about who they’ll approve in almost 12 years. It’s gotten notably harder to get government-backed mortgages—including FHA loans, which are supposed to make buying a first home easier—but lending standards have gotten stricter across the board. (Mortgage availability has been trending lower since 2019, but it fell almost 5% in December alone.)
The reason for the tightening standards is twofold: One, more mortgage companies are leaving the market or merging, resulting in fewer loans being offered. Additionally, declining investor demand for certain mortgage types means lenders can’t easily sell off these loans after closing. That means lenders may need to hold on to loans longer, so to reduce their risk, they choose only the borrowers who are most likely to make their payments.
Still, while qualifying for a mortgage may be more difficult these days, it isn’t impossible—in fact, nearly three out of every four applicants gets approved, according to government data from 2022. And your odds go up if you’ve prepped ahead of time.
Are you hoping to buy a home or refinance your mortgage soon? Here’s how to improve your shot at getting a loan.
Get your debt-to-income ratio down to 28%
Lenders put a lot of stock in your debt-to-income ratio—or DTI. This number tells them how much of your income you’re putting toward debts (and how financially strapped you’ll be after adding a mortgage payment to the mix).
For the best shot at qualifying, you’ll want a DTI of 28% or lower—meaning your existing debt payments, including credit card balances, car loan payments and student loan payments, need to be less than 28% of your monthly earnings. Once your new mortgage payment is factored in, it should be 36% or less.
If you run the numbers and you’re already above the 28% threshold, you have a few options. First, if you have credit card debit, make a larger payment toward your credit cards this month. This will reduce your balances and, therefore, your minimum payment. (Don’t forget, though: You will likely need at least a 3% to 3.5% down payment to buy a house, so make sure you don’t eat too far into savings when paying down your debts.)
You can also look for ways to increase your income: Pick up more hours at work, ask your boss for a raise or, depending on your schedule, add some freelance or consulting work to the equation. If you can increase your income even slightly, it decreases your DTI and improves your shot at qualifying for a loan.
Here’s an example: If you earn $7,000 and have $2,000 in debt payments each month, you’d have a DTI of just over 28%. If you could consistently add $1,000 to your earnings, you’d drop that DTI down to 25%, putting you in much better shape to get a mortgage.
Explore a range of loan types and lenders
No two mortgage programs are exactly alike. Some have higher credit score requirements than others (jumbo loans, for example), while others have income limits or rules as to where you can buy your house (as USDA loans do). There are even some mortgage options with no official credit score minimums (VA loans) and ones that will allow for higher DTIs (FHA loans, if the circ*mstances are right.)
The point is there are many mortgage programs out there, and qualifying can depend on you finding the right loan for your specific situation. If you need help figuring out which program is the best fit, call up a loan officer at your bank or find an area mortgage broker. (Mortgage brokers are kind of like personal shoppers for mortgage loans. They can help you compare loan programs and pick the right one for your finances and budget. Typically, they get a commission from the lender you end up going with.)
Don’t stop at comparing loan types, though. You should also compare lenders, which can vary widely in qualifying requirements, too. Rocket Mortgage—named Buy Side’s best overall mortgage lender last year—currently requires a 580 on its FHA loans, while AmeriSave requires a 600.
Your best bet is to look at three to four different lenders—your home bank, an online lender and maybe a credit union or big-name mortgage company—and get loan quotes from each. This will give you an array of options to consider and the best shot at securing the lowest mortgage rate.
While average mortgage rates have dropped recently, falling from a high of almost 8% last October to the mid-6% range today, your rate can still vary quite a bit from one lender to the next. In fact, according to Freddie Mac, if you get four lender quotes, you’ll see a 0.4 percentage point difference between the lowest and highest rates. That’s the difference between a 6.5% rate and a 6.1% one—or about $130 a month on a $500,000 loan.
Lower rates don’t just save you money either; by reducing your monthly payment and, subsequently, your DTI, a lower rate can make it easier to qualify for a loan, too.
Take your credit score to new heights
Increasing your credit score is another strategy for boosting your mortgage chances. Across all approved loans, the average credit score of borrowers in the last 30 days was 727 (a perfect score is 850). For FHA loans, it was 680.
If your score is lower than that, work to reduce your credit utilization ratio—or the share of your total credit line your balances take up. You can do this by either paying down your balances or asking your credit card issuers for a credit line increase (just don’t go spending that extra cash). According to FICO, if you had a 51% utilization rate and lowered it down to a 26% utilization rate, you could boost your score by 56 points.
Reducing your debts—think paying off student loans or car loans, not just credit card balances—can also improve your score. Your total debts make up nearly a third of your credit score, so any dent you can make in those balances should move your score in the right direction.
Ultimately, if you want the absolute lowest mortgage rate possible, you should aim for a score of at least 760. Scores at this level qualify borrowers for the best mortgage rates—which could mean a lower monthly payment and significantly lower long-term interest costs.
Earlier this week, a 760 score would qualify you for a 6.33% mortgage rate. At a 660 score, it would have meant a 6.73% rate.
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More on mortgages
- Mortgage Rates Could Drop in 2024—But How Far?
- How to Get the Lowest Mortgage Rate
- What Is an Assumable Mortgage?
Meet the contributor
Aly J. Yale
Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.
