Need a Bigger Mortgage to Buy a Bigger Home? Here’s What to Do First
If you’ve been thinking about moving into a bigger home, odds are good that you’re going to need to take out a bigger mortgage in the near future. With that in mind, we have a list of four things that you can do to financially prepare to take out a bigger loan. Read them over so that you have a better idea of what it takes to make sure that you’re able to qualify for a larger home loan.
4 ways to financially prepare for a bigger mortgage
1. Pay down your debt.
When you’re trying to qualify for a bigger mortgage, one of the first things you should do is to work on paying down your debts. Put simply, lenders look at your debt-to-income ratio (DTI) during the underwriting process. This ratio is a measure of how much money you have coming in every month versus how much of it is going toward debt payments. Typically, lenders look for this ratio to be under 43%.
If you need to get your DTI in better shape, you may want to think about using either the debt snowball plan or the debt avalanche plan to start paying down your balances. With the debt snowball plan, you make the minimum payment on all your debts except the one with the smallest balance. Then, you put the remainder of your money toward your debt with the smallest balance until it is paid off in full. This method is supposed to help you say motivated by giving you a bunch of tiny wins at the beginning of your debt payoff journey.
On the other hand, the debt avalanche method is supposed to help you save money by encouraging you to pay off your debt with the highest interest charges first. With this method, you’ll make the minimum payment on all of your debts except the one with the highest interest charge. Then, you’ll put the remainder of your money toward paying off your balance with the highest interest rate.
2. Start researching home prices.
Once you’ve got a handle on your debt, the next step is to start researching home prices in your area. While this isn’t technically a financial step, it’s important to do because it will help you start to think realistically about how much it will cost to get the bigger home of your dreams.
To that end, it’s a good idea to start window-shopping for homes. While you can do this on websites that use automated valuation models, the better thing to do is to get in touch with your real estate agent. Your agent will be able to set you up on an MLS search, which will provide you with much more accurate information about current home prices.
3. Level up your income.
After you have an idea of how much will need to spend in order to be able to purchase a bigger home, you can talk to your lender about how much income you’ll need to make in order to qualify for that size mortgage. Unfortunately, your lender might tell you that you need to make more money in order to be approved for a loan of the size you need.
If that happens, will need to focus on ways to level up your income. If you have a traditional nine-to-five job, you can always consider moving to a different company or asking for a raise. On the other hand, if you are a freelancer, you can think about upping your rate or offering additional services. In either case, you may want to consider launching a side hustle that will allow you to bring in some additional income each month.
4. Start saving for a down payment.
Lastly, once you have more money coming in, the last step is to start saving for a down payment. While you don’t need a 20% down payment any longer, you’ll need at least 3% to 5% if you are in the market for a conforming loan. That said, if your dream property is more expensive and you’re going to need a jumbo loan, plan on putting down at least 10% of the home’s purchase price.
As for how to start saving, the first step is to include your savings goals in your budget. After you have a better idea of how much you can afford to put away each month, consider setting up automatic transfers from your checking to your savings account. This will ensure that you are putting away money on a regular basis and you won’t have to worry about putting the money aside each month.
The bottom line on getting a bigger mortgage
At the end of the day, getting a bigger mortgage is likely going to feel like a stretch. However, there are things that you can do to financially prepare for getting a bigger loan that will make the transition easier. In light of that, feel free to use the information in this post as a guide on how to get started. However, if you have more specific questions, it might be a good idea to get in touch with a lender and to work closely with your financial advisor.