5 ways to improve your chances of obtaining mortgage approval

Securing a mortgage is a significant step toward homeownership, and the process can be both exciting and daunting. One of the most critical factors in this journey is getting approved by a lender.

While every borrower's situation is unique, there are several strategies you can implement to improve your chances of obtaining mortgage approval.

In this article, for those starting the new year pondering a mortgage application, John Lowe of MoneyDoctors.ie lists five key ways to increase your likelihood of being approved for a mortgage.

1. Check your credit history

Your credit history is one of the most important factors lenders consider when reviewing your mortgage application. One missed car payment or credit union loan repayment could put your application back five years.

It is easy to check your history: simply email the Central Credit Register with your name, address and date of birth and three to four days later you will receive a report. The service is free, too.

To improve your credit, focus on the following:

• Pay your bills on time: no missed payments especially. Set up automatic payments or reminders to ensure you never miss a due date.
• Reduce credit card balances: never miss the minimum payment and if you can pay it all off, you also avoid heavy interest excesses.
• Check your credit report: Review your credit report to make sure your next loan application is accepted.

Improving your credit history can take time, so it's best to start the process in advance of applying for a mortgage.

2. Save for a larger down payment

The size of your down payment can have a significant impact on your mortgage approval. The maximum for first time buyer or second-hand buyer is 90% of the purchase price. A larger down payment reduces the lender's risk and shows that you are financially stable. While the typical down payment for many loans is 10%, you should strive to invest as much of your own funds as possible - this way, you are saving interest and enhancing affordability.

By saving for a larger down payment, you can achieve several benefits:

• Lower monthly payments: A larger down payment reduces the loan amount, which means lower monthly payments.
• Better loan terms: Lenders are more likely to offer favourable interest rates and terms to borrowers who make a substantial down payment.
• Reduce the mortgage insurance (mortgage protection – compulsory): If your down payment is less than 90% you will attract a cheaper mortgage protection premium.

If you're struggling to save for a larger down payment, consider setting up a dedicated savings account and cutting back on unnecessary expenses.

Having a savings record is imperative – some applicants may be living at home paying no rent. The lender will want to know you have the ability to pay a mortgage repayment, and ensure that if you are saving, you continue and do not withdraw any funds prior to the actual mortgage drawdown itself.

Usually lenders want up to six months minimum regular savings outside of the minimum 10% deposit.

3. Reduce your debt-to-income (DTI) ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying debts. Lenders use this ratio to determine whether you can afford to take on additional debt. A lower DTI ratio makes you a less risky borrower and increases your chances of mortgage approval.

Remember: lenders will deduct debt repayments from your income (typically one year’s repayments taken off your annual income, which reduces the amount you can borrow).

Most lenders prefer a DTI ratio of 35% or less. To improve your DTI ratio, consider:

• Paying off existing debts: Focus on paying down high-interest debts, such as credit cards, to reduce your monthly obligations.
• Avoiding new debt: Before applying for a mortgage, refrain from taking on new debt, including car loans or large purchases that can increase your monthly payments.
• Refinancing existing loans: Refinancing loans over a longer period can help lower your monthly payments and improve your DTI ratio.

Reducing your DTI ratio not only improves your mortgage approval chances but also strengthens your financial profile in general.

4. Permanent employment

Lenders prefer borrowers who have a stable source of income, as it assures them that you will be able to make your mortgage payments on time. Ideally, you should have at least passed the probation period and be regarded as permanent. First time borrowers will attract up to four times their annual income. For some professionals this may be increased. If you’re self-employed, having a consistent income and solid financial records for the past two years is essential.

If you’ve recently changed jobs, consider delaying your mortgage application until you've been in your new role for at least six months. Similarly, avoid making significant career changes or leaving a job voluntarily during the mortgage approval process.

To strengthen your employment details, ensure that you:

• Maintain stable, full-time employment: The more consistent and reliable your income, the better your chances of securing a mortgage.
• Provide thorough documentation: Lenders will ask for pay slips, a status enquiry form completion (signed by your employer), tax returns, and other financial documents to verify your employment and income. Make sure these documents are up-to-date and accurate.

5. Avoid making major financial changes

When applying for a mortgage, it’s crucial to avoid making significant financial changes that could raise red flags for lenders. Lenders assess your financial situation to determine whether you can handle the responsibility of a mortgage, and any sudden changes can create doubt.

Here are some actions to avoid:

• Opening new credit or current accounts: Refrain from applying for new current accounts, credit cards or loans during the mortgage application process, as this can muddy the waters of your finances for the lender.
• Making large purchases: Large purchases, such as buying a car or taking out a personal loan, can deplete your savings or increase your debt, negatively affecting your mortgage application. After your mortgage has drawn down is the time to complete such transactions.

To stay on track, keep your finances stable and refrain from making any drastic changes in the months leading up to your mortgage application.

Improving your chances of obtaining mortgage approval involves careful planning and financial discipline. By maintaining a good credit history, saving for a larger down payment, reducing your DTI ratio, demonstrating stable employment, and avoiding significant financial changes, you can increase your chances of securing the home loan you need.

Be patient, stay proactive, and work on these strategies well in advance to put yourself in the best possible position when applying for a mortgage or email me.

For more information click on John Lowe's profile above or on his website.