Category Archives: First Time Mortgage

5 Ways to Eliminate Debt and Qualify for a Mortgage


Some home buyers don’t know the negative effect debt can have on a mortgage application. You don’t have to be debt-free to purchase a home, but excessive debt can reduce purchasing power or result in a higher mortgage rate.

When applying for a home loan, your lender pulls your credit report and credit score, and evaluates how much you owe on credit cards, auto loans, student loans, and more. When compared to your income, this information gives lenders an idea of how much you can spend on housing.

As a rule, your mortgage payment cannot exceed 28 to 30 percent of your gross monthly income. Your total monthly debt payments, which also include the new mortgage payment, shouldn’t exceed 36 to 43 percent of your gross monthly income. This maximum depends on whether you receive a conventional or an FHA home loan.

Although you’re allowed to spend up to 30 percent of your gross monthly income on housing, this doesn’t mean a bank will approve any amount up to this percentage. For example, if your loan or credit card payments take a chunk of your monthly income, a lender may say you only qualify for a mortgage with a payment up to 25 percent of your gross monthly income, which limits your options. Therefore, you should eliminate as much debt as possible before applying for a mortgage.

This not only increases affordability, less debt makes it easier to adjust to home ownership and new expenses. Debt elimination is easier said than done and it can take months or years to pay down balances. But there are ways to help wipe the slate clean faster.

1. Temporarily Downsize

Temporarily downsizing can provide extra cash to pay off debt. Once you finish paying off debt, begin saving for mortgage-related expenses, such as a down payment and closing costs. Average down payment minimums range from 3.5 to 5 percent, and closing costs can range from 2 to 5 percent of the loan balance. Consider getting a roommate to share expenses with, moving into a cheaper home on a temporary basis, or moving in with your parents to save money.

2. Sell Unused Items

It might be difficult to get rid of treasured belongings. However, if you focus on the big picture and think about your future home, it’ll be easier to unload stuff you don’t need and don’t use on a regular basis. The more you have, the more you have to maintain. Decluttering can put cash in your pocket and simplify your life. Make a list of items you no longer use. Plan a yard sale, list items for sale online, or work with a local consignment shop.

3. Pay Off Debt with Free Money

Some people get free money throughout the year, whether it’s an end-of-the-year work bonus, a sizable tax return, or cash as a gift. Planning a vacation or shopping spree is fun. A smarter approach, however, is using unexpected money to pay off credit cards and other loans. By doing so, you can eliminate your debt months sooner.

4. Consolidate to a Lower Interest Rate

Credit card debt is one of the hardest debts to erase because of high interest rates. See if you qualify for a 0% interest balance transfer credit card. These cards typically offer 0% interest for the first six to 18 months. Transfer all your balances to the new card. You’ll simplify your finances, and with no interest charges, one hundred percent of your monthly payments will go toward reducing the principal.

As you pay down your credit card balance, your credit utilization ratio improves. This can raise your credit score and help you qualify for a lower interest rate when you’re ready to get a mortgage.

5. Find a Second Income Stream

How much time do you spend watching TV or surfing the Internet every week? If you’re serious about paying down debt and getting a mortgage, get a part-time job a few days a week or think of a side businesses you can do. If you can earn an extra $150 a week, that’s an extra $600 a month or $7,200 a year. This can pay off your debt and help build a down payment fund.

Everything You Need to Know About 5/1 Adjustable Rate Mortgages


Some home buyers choose a fixed-rate mortgage in order to make regular, steady payments. But this isn’t the only option. You can also choose an adjustable rate mortgage (ARM), which features a fixed interest rate for a set number of years, followed by an interest rate that changes year-to-year based on the market. There are several options for an adjustable rate mortgage, with the 5/1 ARM being one of the most popular.

This type of mortgage has a fixed interest rate for the first five years of the mortgage term. Every year thereafter, the interest rate resets. With each adjustment, your rate may decrease, increase, or remain the same. Fluctuating rates can have a tremendous impact on monthly payments, so this option may not be right for everyone.

Here’s what you need to know before agreeing to a 5/1 adjustable rate mortgage.

  1. Who can benefit from a 5/1 ARM?

Some people avoid adjustable rate mortgages because these loans are riskier than other lending options. However, an adjustable rate can be beneficial in certain situations.

An interesting feature of ARMs is that the interest rate during the fixed-rate period is typically lower than the interest rate on a 30-year fixed-rate mortgage. With that said, a 5/1 ARM might be an option if you need to keep your mortgage payments as low as possible, at least within the first five years of getting the loan. This can benefit first-time home buyers who want to lower their expenses. In addition, a lower interest rate helps borrowers get more house for their money, while keeping payments within an ideal range.

But a lower interest rate isn’t the only reason to choose a 5/1 ARM. These mortgages are more suitable for buyers who will live in their homes for five years or less. This could apply to home buyers in the military who know their family will move within the next few years. These buyers can purchase a home, enjoy a lower rate for the next five years, and then move before their rate resets.

Additionally, a 5/1 ARM might work if you expect your income to increase in the future. One benefit of an adjustable rate mortgage is that these loans feature rate caps, which limit how much the interest rate can increase from year to year, as well as how much the rate can increase over the life of the loan. If you run the numbers, understand the worst-case scenario, and feel you can swing higher possible payments in the future, a 5/1 ARM isn’t as scary or risky. On the other hand, if you doubt your ability to manage potentially higher mortgage payments in the future, you’re probably better off with a fixed rate.

  1. Who won’t benefit from a 5/1 ARM?

Some people who don’t foresee relocating or receiving an income increase within the next five years may also select a 5/1 ARM. This is a gamble. In their minds, they can enjoy a lower interest rate today, and then refinance to a fixed-rate mortgage in five years before their rate resets.

This plan makes sense in theory. But there are no guarantees that they’ll be able to refinance from a 5/1 ARM to a fixed-rate. Refinancing a mortgage requires applying for a new home loan and re-qualifying. The lender will verify income and credit, and if a borrower’s income decreases after getting the original mortgage, or if his credit score drops, this affects qualifying for a refinance and getting a favorable interest rate.

If a borrower is unable to refinance and can’t afford their new payment after a rate adjustment, there’s the risk of payment problems, which can damage his or her credit score. There’s also the risk of losing property and equity.

So, if you’re in the market for a home loan, be sure to review all your options. Know your risks and talk to a financial planner if necessary – you never know how much you might actually save.


See our official Top 5 List of Mortgage Lenders to lock in your low mortgage rate today.


Sourced and Seasoned Down Payments: What You Need to Know


If you’re in the process of purchasing a home loan, you probably know how difficult it is to qualify for a zero-down loan. Most people don’t – money must be brought to the closing table for down payment, which can range from 3 to as high as 20 percent.

It must also be clear that you as the borrower have enough assets for your down payment and closing costs – and unfortunately, a mortgage lender needs more than your word. They’ll require proof of funds, which they must confirm are sourced and seasoned, but what exactly does that mean?

1. Funds for mortgage-related expenses must be sourced.

When you apply for a home loan, the lender needs to know the source of funds used for mortgage-related expenses. From your standpoint, the source of funds may not matter. As long as you have cash available, a lender should willingly approve your loan, right?

Unfortunately, it’s not that simple. For home purchases, lenders do not allow applicants to borrow funds for their down payment and closing costs. The money must come from their own funds or as a gift from a relative, such as a parent, sibling, grandparent or other approved relative. Since it’s a gift, the giver won’t expect repayment.

If you receive a gift from a relative, that relative has to provide your lender with a gift letter, which will be included in your file. This letter requires detailed information about the gift, such as the giver’s name and the gift amount. The giver must also express within the letter that funds are not a loan.

Once you review your Loan Estimate with a mortgage lender, you’ll receive a rough estimate of the cash needed to close, along with inquiries about the source of your down payment. If you’ve funded the down payment yourself, acceptable sources include your personal savings account, proceeds from the sale of a previous home, or cash from a retirement account (IRA or or 401K.)

2. Funds must seasoned, contain a paper trail of at least 60-90 days.

It isn’t enough to have funds for a down payment and closing costs, you must provide a paper trail. The lender will request bank statements and retirement account statements from the past 60 to 90 days. Any funds used to cover closing and your down payment must have been in your account for at least two to three months. If the bank checks your statements and sees that funds appeared in your account within the past couple of weeks, you’ll have to provide an explanation. Basically, the bank must verify that you didn’t get a loan for your down payment.

If funds haven’t been in your account for at least 60 to 90 days, this doesn’t necessarily hurt your approval chances. The bank may approve your mortgage, as long as you can provide a reasonable explanation. For example, did you sell personal items to drum up cash for your down payment? Or maybe you recently received a work bonus, an inheritance, or other unexpected cash? If you can prove the source of recent deposits, you should be okay.

Since lenders require seasoned funds and proof by means of bank statements, it’s important to keep down payment and closing costs funds in a bank savings account. Some people make the mistake of saving their money in cash at home. However, when you keep your savings at home, there isn’t a paper trail, and some banks may not approve your loan.

For an easier loan approval process, deposit mortgage-related cash into a savings account and wait until you have at least two to three month’s worth of bank statements before applying.

What is “Stability of Income” When Qualifying for a Mortgage


You can’t get a mortgage until you can afford the home loan payment. But the amount of your paycheck isn’t the only thing banks consider. Underwriting also looks at the stability of your income.

 Not everyone applying for a mortgage is approved. And sadly, some people are rejected for home loans because they don’t fully understand a lender’s income requirements. You don’t need perfect circumstances to qualify for a mortgage loan. But you must prove that your income is stable and consistent.

1. No gaps in employment

 When applying for a home loan, the lender also looks at your employment history. The bank checks for any significant or recent gaps in employment. Of course, mortgage lenders realize that some situations are beyond your control. So if you have gaps in employment within the past two years, you might still qualify for a loan if you can provide a reasonable explanation.

 Maybe you were laid off, but found work within a couple of weeks or months in the same field. But if you’re just now returning to the workforce after a significant gap, or if you’re newly employed with a short work history, the lender might question the stability of your employment, which makes you a risky candidate for a home loan.

2. Avoid frequent job changes

Even if you don’t have gaps in employment, frequently switching employers every year or six months can make a lender nervous. Your income may be consistent, but lenders prefer applicants who’ve been with the same employer for at least 24 consecutive months, or who’ve at least worked in the same field for two years.

Fortunately, some lenders also take into consideration the reasons behind frequent job changes. For example, if job changes resulted in moving up in your career, your lender might overlook the switch.

3. When did you become self-employed?

Self-employed people can qualify for a mortgage loan, but this depends on several factors, such as when you became self-employed and your income according to tax returns.

 You will need to provide at least two years of tax returns before you can qualify for a home loan as a self-employed borrower. This is important, so keep good records. As a self-employed borrower, you don’t receive a paycheck stub or a W-2. Your tax return is the primary statement lenders use to verify your income.

 Be aware that business deductions or write-offs lower your net income, which can also reduce your qualifying amount when applying for a home loan. Therefore, if you’re planning to purchase a home, consider limiting your number of tax deductions for a couple of years to boost your net income. When a lender evaluates your tax returns, underwriting also checks to see if your income has increased or decreased over the past two years. Self-employed people typically experience fluctuating income from year to year. With that said, mortgage lenders use their average income over a two-year period for qualifying purposes.

How to Shop for a Mortgage Without Damaging Your Credit


Some homebuyers focus their energy on finding a house within a specific price range. But while getting a fair price for a property is important, it’s also advantageous to secure a low-rate, affordable mortgage loan.

Mortgage interest rates vary from lender to lender. This is why it’s crucial to shop around and compare home loans offered by different lenders. These lenders include big banks, community banks, credit unions and online lenders. After completing a pre-qualification form, these financial institutions can evaluate whether you’re eligible for a home loan, and provide a rough estimate of what you can expect to pay with regard to interest and fees.

Interest affects how much you pay on a monthly basis and over the life of the mortgage. Mortgage fees, or closing costs, include the lender’s loan origination fee, credit application fee, appraisal fee, attorney fees, etc.

Purchasing a home is a major investment, and sad to say, mortgage-related costs can drain your savings. Comparison shopping, on the other hand, can help you procure a low-rate mortgage, plus save on lender fees.

Every time you contact a lender to request a rate quote, the bank will pull your credit report. You might already be aware that too many inquiries can hurt your credit score. Typically, each inquiry reduces credit scores by a few points. The number of points lost per inquiry varies depending on the type of pull. What’s more, an inquiry can remain on your credit report for up to two years.

This knowledge stops some homebuyers from requesting multiple mortgage quotes. You shouldn’t let your fear of inquires prevent comparison shopping. If you never compare loan offers, there’s no guarantee that you’ll find the most favorable rate or the lowest fees.

The good news is that shopping for a mortgage doesn’t have to damage your credit score. But to avoid credit damage, you have to compare mortgages the correct way.

While checking your own credit doesn’t hurt your credit score, it’s a different story when a lender checks your credit. Each credit pull can lower your score by as little as two points, or as much as five points. So it’s important to only apply for credit when necessary.

Many financial experts recommend rate shopping when applying for a mortgage. If you fear hurting your credit score—don’t. You can successfully shop for a mortgage loan without damaging your credit score. This is because credit scoring systems are designed to recognize actions that are characteristic of rate shopping. Furthermore, FICO scoring models don’t penalize consumers for being smart borrowers. The secret, however, is requesting multiple quotes within a specific window of time.

In the case of comparison shopping for a mortgage, similar inquiries that occur within a 45-day period are counted as a single inquiry for scoring purposes. A mortgage pull can take five points off your score. So if you apply with 10 mortgage lenders within a 45-day window, rather than lose 50 credit score points, you only lose five points.

Understand that this provision typically only applies to mortgages and auto loans. So while you wouldn’t want to apply for too many credit cards in a short span of time, you can apply for as many mortgages as you like within a six-week period.

Terms to Avoid When Getting a Mortgage


There are different types of mortgage products available, each with its own set of terms. When applying for a mortgage, it’s important to understand the ins and outs of the loan. Since a mortgage is a big commitment, you should only agree to terms you’re comfortable with.

To avoid mortgage problems or regrets, here are five mortgage terms you might skip.

1.Interest-only home loan

Interest-only home loans were popular in the mid-2000s. With these loans, many people purchased a property and only made interest payments for the first few years of the mortgage term. This approach helped many afford homes as prices skyrocketed. The problem, however, was that mortgage payments would nearly double once interest-only payments ended. Many borrowers couldn’t afford their new payments and this triggered a string of foreclosures.

These products disappear, but have recently made a comeback. Nowadays, some lenders only offer interest-only products on investment loans or jumbo loans. These loans have stricter qualification requirements, so buyers often need a larger down payment and excellent credit.

Even if you qualify for an interest-only mortgage, be aware that your mortgage payment will increase significantly in the future. If you’re unable to refinance at this time, you could get stuck with a monthly payment beyond your range of affordability.

2.Adjustable-rate mortgage

Adjustable-rate mortgages (ARM) aren’t the worse decision, but they can be risky. These loans have an interest rate that resets every year after an introductory fixed-rate period. ARMs are attractive because they start off with rates lowered than the average fixed-rate mortgage. This allows borrowers to enjoy a lower monthly payment and purchase more for their money. But because adjustable-rate mortgages are unpredictable, there’s the risk of interest rates increasing year-by-year. And when your interest rate increases, so does your monthly payment.

These mortgages aren’t as scary if you plan to sell or refinance the property before your first rate adjustment. But even you have a plan in place, there’s no guarantee you’ll be able to sell the home or refinance at a later time.

3.Prepayment penalty

A prepayment penalty is a clause some lenders include in their mortgages. This discourages buyers from refinancing or selling their homes within the first few years of the term. Fortunately, lenders can only impose a prepay penalty up to the first three years of a mortgage. Some prepayment penalties apply when a borrower refinances or sells the house, whereas others only apply when a borrower refinances.

A prepayment penalty doesn’t cost a dime if you keep the mortgage for at least three years. But if you pay off the loan sooner, this penalty could end up costing you several month’s of interest.

4.High interest rate

Every mortgage has an interest rate, and lenders take several factors into consideration when determining a borrower’s rate. When applying for a mortgage loan, it’s important to research and educate yourself on the competition to ensure you’re getting a fair rate. Understand, however, that people with lower credit scores typically pay more interest. A high rate means you’ll pay more on a monthly basis and over the life of the loan. You can avoid a higher mortgage rate by improving your credit beforehand. For example, pay down consumer debt, pay your bills on time, don’t cosign loans, and check your credit report for errors.

How is Refinancing Different From Getting an Original Mortgage


Mortgage refinancing is the process of getting a new home loan to replace an existing one. You’ll fill out a new mortgage application and the bank will check your credit. But although refinancing and getting an original mortgage are basically the same process, there are slight differences between these transactions.

1.You need at least 5% equity for a refinance

If you apply for a traditional refinance, your property will need at least 5% equity. There are no rules on the amount of equity needed when getting an original mortgage, although you can’t get an original mortgage for more than the value of a property.

When you buy a house, your mortgage lender sends an appraiser to the home. If the appraiser determines that the house is worth $200,000 and you agreed to a sale price of $200,000, you can proceed with the mortgage despite having minimum equity. This isn’t the case with a traditional refinance.

There are options for refinancing a property with little or no equity. If you’re eligible for the Home Affordable Refinance Program (HARP), you can refinance up to 125% of your property’s value. But this option isn’t available to everyone. To qualify, your home loan must be guaranteed by Freddie Mac or Fannie Mae.

2.You don’t need a down payment with a refinance

Typically, a down payment isn’t required when refinancing a mortgage loan, although you can give the bank a down payment. The only time a lender requires money down with a refinance is when the value of a house is less than the mortgage balance.

When you get an original mortgage for a new purchase, the mortgage lender will almost always require a down payment between 3.5% and 5%, depending on whether you’re getting an FHA home loan or a conventional home loan. Some home loan programs do not require a down payment, such as a VA and a USDA home loan. But you have to meet specific requirements to take advantage of these products.

3.You have different options for managing closing costs

There are closing costs regardless of whether you’re getting an original mortgage or refinancing. In some cases, you don’t have to pay closing costs out-of-pocket.

With a refinance, the lender can wrap closing costs into the mortgage loan, or the bank may pay your closing costs if you agree to a higher mortgage rate. Likewise, there are ways to avoid paying your own closing costs when applying for an original mortgage. If you get a conventional or an FHA home loan, both options allow sellers to contribute a percentage to your closing costs. Additionally, an FHA home loan lets you include closing costs in your mortgage balance.

4.Refinancing changes the terms of an original mortgage

One of the biggest differences between these transactions is that refinancing changes the original terms of your home loan. As mortgage rates drop, you can refinance to a lower interest rate and take advantage of a lower monthly payment, which frees up cash for other purposes. Refinancing is also a way to switch to a completely different mortgage product. You can convert an adjustable-rate to a fixed-rate, reduce or extend your home loan term, or switch from an FHA home loan to a conventional loan.

Here’s Why a Mortgage Lender May Request Additional Documentation


If you want to buy a house, the sooner you gather your financial paperwork, the sooner you can apply for a mortgage. A home is a major purchase, and since the bank is lending hundreds of thousands of dollars, you’ll have to provide the loan officer with countless documents. In fact, the amount of paperwork involved with a home purchase is more than what most landlords request.

It doesn’t matter who you are or what you do, you’ll have to supply copies of your tax returns for the past two years as evidence of consistent income, plus you’ll need to hand over your pay stubs from the past 30 days. The lender also pulls your credit report and reviews your bank statements for the past two months to get an idea of how much you have in reserves for your down payment and closing costs.

This information is usually enough to assess whether you qualify for a mortgage. But sometimes, underwriters request additional information from borrowers. If this happens to you, there’s no reason to panic. It’s the underwriters job to calculate your risk, and to do this, he needs a complete understanding of your financial profile. If you get a call from the lender requesting additional information, provide this information as soon as possible to avoid any delays.

But what type of additional information may an underwriter request? Here’s a breakdown of possible reasons why your lender may request additional documentation from you.

  1. You have an unusual deposit in your bank account

Your mortgage lender needs to see at least 60 days of bank statements from all your accounts. Getting a mortgage involves closing costs and a down payment, and the bank needs to know how you plan to cover these expenses.

When reviewing your bank statements, the underwriter will specifically look for any unusual large deposits within the past 60 days. If you have suspicious deposits into your account, the underwriter will call and ask for an explanation. Be prepared to provide documentation for any inheritances, settlements, or work bonuses you receive. If you receive a large deposit as a gift for your down payment, the lender will need a gift letter from the giver.

  1. You’ve had a divorce

This might come as a surprise, but if you’re divorced the lender will likely need to see a copy of your divorce decree. It doesn’t matter how long it’s been since the divorce. This information is important because the divorce decree has information that doesn’t appear on your credit report, such as specifics about support payments.

If you’re receiving alimony or paying alimony to an ex-spouse, the lender needs this information to accurately calculate how much you can afford to spend on a property. And don’t think you can hide a divorce from the lender. The bank will run a background check, which will reveal past martial statuses.

  1. You’re not a U.S. citizen

When applying for a mortgage, the lender will typically only ask for a copy of your drivers license and you’ll have to provide your Social Security number on the application. Understand, however, that if you check the box stating that you’re not a U.S, citizen, the lender will request a copy of your birth certificate.

  1. You’re self-employed

If you’re self-employed, lenders will use your previous two year’s tax returns to determine mortgage eligibility. However, some lenders may also request a year-to-date profit and loss statement. This is more likely to happen if you’re purchasing a property after the first quarter of a new year. Since you don’t have paycheck stubs like an employee, the lender uses this statement to verify your current income.

  1. You’ve had a short sale, bankruptcy, mortgage modification, etc.

A lender may also request additional documentation if you’ve had a previous short sale, bankruptcy, mortgage modification or foreclosure. This information appears on your credit report, but the lender may need to know specifics about the transaction. So don’t be surprise if the underwriter requests a settlement statement for a short sale, trustee sale information for a foreclosure or statements that explain the details of a mortgage modification and bankruptcy.

Home Buying Mistakes that Can Hurt Your Retirement


As you look ahead to the future, you might be somewhat apprehensive about retirement. On one hand, you look forward to this time in your life. But on the other hand, you worry about having enough income after leaving the workforce. These type of concerns are understandable; and the fact that you’re thinking ahead proves you’re financially savvy.

The truth is, some of the decisions you make today will have a tremendous impact on your later years. And while you may not draw a connection between buying a home and retirement, the way you approach homeownership can affect your future. And unfortunately, some home buying mistakes can hurt your retirement.

  1. Buying too much house

You work hard, so it’s understandable why you’d want to purchase your dream house. Home is a haven, and you deserve to have everything you’ve always wanted in a house—your own private paradise. But it’s also important not to buy “too” much house.

You shouldn’t buy a house at the expense of saving for retirement. Retirement planning should be a priority. The earlier you start saving, the better. A mortgage lender may approve you for a large amount, but you need to ask yourself an important question: Will spending more and buying a larger home interfere with my ability to prepare for retirement?

Putting all your money into a house is dangerous because you may have little—if anything—left to prepare for the future. Sometimes, less is more.

  1. Tapping your retirement account for a down payment

If you have a 401(k) or an individual retirement account, you’re allowed to borrow money from these accounts as down payment on a house. But although the money is available, make sure you weigh the pros and cons.

Taking money from a retirement account reduces earning potential. As a result, there’s a chance you’ll retire with less than you need. Unless, of course, you’re disciplined and able to repay what you take. If you’re young, you might have plenty of time to repay yourself and keep your retirement plan on track. But if you’re middle-aged or retiring in the next 10 or 15 years, consider other ways to get funds for a down payment. For example, some community banks offer portfolio loans which require zero down, or you may qualify for local grant programs that offer down payment and closing costs assistance. Talk with your lender or realtor for information.

  1. Paying off a mortgage early

Paying off a mortgage before retiring can significantly reduce your monthly expenses, which means you won’t need as much income in retirement. This can remove some of your financial stress, allowing you to retire without the heavy burden of a mortgage on your shoulders. However, you should only pay off a mortgage early when extra payments don’t interfere with retirement planning. The same way you shouldn’t buy “too” much house at the expense of your retirement account, you shouldn’t pay off your mortgage at the expense of your retirement account.

Rather than put extra money toward paying off a mortgage early, you could put this extra money toward maxing out IRA or 401(k) contributions. This approach can grow your retirement account substantially, providing enough income to sustain you after retiring.

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.