How to Increase Borrowing Capacity When Buying a House


Different variables affect borrowing capacity when applying for a mortgage loan. Loan officer and underwriters take different factors into consideration, such as your income and current debts, and then determine what you can realistically afford. Unfortunately, some borrowers are pre-approved for less than anticipated. The good news is that there are ways to increase borrowing capacity and qualify for a larger mortgage.

  1. Claim more of your income on your tax return

When applying for a mortgage loan, the lender will not only request your most recent paycheck stub, the bank also looks at your tax returns from the past two years and uses the average of both years to decide how much you’re eligible to receive.

At the end of the day, it doesn’t matter how much you “say” you earn, lenders determine qualifying amounts based on what’s on paper, so it’s important to claim a sufficient amount of income. This is especially important if you’re self-employed and write off several business expenses. While your business expenses may be legitimate and allowed, the more expenses you write off, the lower your income appears on paper.

If you’re planning to buy a house in the next couple of years, consider limiting your number of write-offs to boost your net profit. You’ll pay more in income taxes for these years, but a higher income makes it easier to qualify for a mortgage and increases borrowing capacity.

  1. Add your spouse to the mortgage

If you’re the breadwinner and your spouse only works part-time, you might look into getting a mortgage in only your name. This is an option, but if your income alone limits borrowing capacity, considering adding your spouse’s name to the mortgage. Even if your spouse earns a lot less than you, a joint mortgage can work in your favor. This is because the lender will use your combined incomes to determine how much you can afford.

Of course, the bank will also pull your spouse’s credit score and use the lower of your two numbers to determine the mortgage rate. Therefore, it’s only a good idea to add your spouse to the mortgage if he or she has good credit.

  1. Lower your debt

Paying off credit cards and other loans also increase borrowing power. The amount you receive for a home purchase is affected by how much you owe elsewhere. Your total debt payments (including the mortgage payment) should not exceed 36% to 43% of your gross income. If you have auto loans, high credit card payments and personal loans, these debt payments can push your total debt-to-income ratio close to or over the limit, which affects how much you receive from a mortgage lender. For example, after looking at your current debts, a lender may conclude that you can only afford to pay $1,000 a month for a mortgage. However, if you paid off some of these debts, you might increase borrowing capacity by a couple hundred dollars a month, helping you afford a mortgage of $1,200 or $1,300 a month.

  1. Increase your credit score before applying for a mortgage

Getting the lowest mortgage rate possible can increase borrowing capacity. One of the best ways to ensure a low rate is to improve your credit score before borrowing. You can qualify for a mortgage loan with less than perfect credit. You only need a score of 620 for a conventional loan, and a score of 500 for an FHA loan. Just know that a low credit score can result in an interest rate that’s one or two percentage points higher than the rate offered to someone with excellent credit. A two-percent difference increases your mortgage payment and limits how much you’re able to borrow.

  1. Choose the right kind a mortgage

You can also increase borrowing power by selecting the right type of mortgage loan. Traditionally, home loan payments with a conventional mortgage cannot exceed 28% of a borrower’s gross income. If you were to apply for an FHA home loan, you can get a mortgage payment up to 31% of your gross monthly.