DTI Archives - Hanover Mortgages

The 9 Top Reasons Mortgage Loans Are Denied in the U.S.

Although interest rates have inched up recently, they remain at historic lows, spurring demand in both home purchases and mortgage refinancing. However, many lenders have tightened up their borrowing standards due to the economic uncertainty of the pandemic, and hopeful loan applicants may find it hard to get approved. According to loan-level mortgage data from the Home Mortgage Disclosure Act, the denial rate for conventional, single-family loans was 18.8% (excluding withdrawn and incomplete applications) in 2019.

Mortgage application denial rates vary by purpose of the loan. When considering total loan applications for conventional, single-family loans, 2,055,774 applications were denied. At 43%, denial rates were highest for home improvement loans. Loans for home purchases had the lowest denial rate, at just 10%. Refinancing applications, both with and without a cash-out component, had denial rates in between, at 16% for non-cash-out and 18% for cash-out refinance loans.

Mortgage application denial rates vary not only by purpose of the loan but also by the race and ethnicity of the applicant. Non-Hispanic White applicants and co-applicants of different races (“Joint”) had the lowest denial rates at 17%. Black, American Indian or Alaskan Native, and applicants of two or more minority races all had a denial rate that was more than twice as high as that for White applicants. Hispanic or Latino borrowers also had high denial rates, at nearly 30%. The difference in denial rates reflects differences in credit profiles and application types across different demographic groups, but it also may reflect racial and ethnic discrimination in lending behavior.

Loan approvals and denials also vary widely by location. Denial rates skew higher in the South, Southeast, and parts of the Northeast, while denial rates are much lower in the Midwest. This could be due to varying demographic makeups and local job market conditions. At the state level, Mississippi and Florida have the highest mortgage denial rates in the U.S. at 27.3% and 25%, respectively. At the opposite end of the spectrum, North Dakota has the lowest mortgage denial rate in the country, at just 10.2%.

To find the top reasons mortgage loans are denied, researchers at Construction Coverage analyzed the latest data from the Home Mortgage Disclosure Act. The researchers ranked reasons mortgage loans are denied based on the percentage of all denials mentioning each reason. For each reason that mortgage loans are denied, researchers also calculated the total annual denials and the percentage of denials that were due to that reason for several loan types: home purchase, refinancing, cash-out refinancing, and home improvement.

The Top Reasons Mortgage Loans Are Denied

Couple stressed about bills

Photo Credit: Alamy Stock Photo

1. Debt-to-income ratio

Percentage of all denials: 37.2%
Total annual denials: 765,772
Percentage of home purchase denials: 36.2%
Percentage of refinancing denials: 38.0%
Percentage of cash-out refinancing denials: 35.4%
Percentage of home improvement denials: 37.2%

The debt-to-income ratio (DTI) ratio is the share of gross monthly income (pre-tax) that goes towards debt payments (rent or mortgage, car payment, credit cards, student loans, etc.). A lower DTI can help applicants get approved for a mortgage.

Paying with a credit card

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2. Credit history

Percentage of all denials: 34.8%
Total annual denials: 715,393
Percentage of home purchase denials: 34.2%
Percentage of refinancing denials: 24.8%
Percentage of cash-out refinancing denials: 25.8%
Percentage of home improvement denials: 44.8%

A mortgage applicant’s credit history gives lenders an idea of how risky it is to loan an applicant money. Credit history is a record of how an individual repays debts, such as credit cards, mortgages, car loans, and other bills.

Fixer upper house in disrepair

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3. Collateral

Percentage of all denials: 19.7%
Total annual denials: 404,084
Percentage of home purchase denials: 13.9%
Percentage of refinancing denials: 18.5%
Percentage of cash-out refinancing denials: 19.6%
Percentage of home improvement denials: 23.4%

Insufficient collateral means that the home an applicant is trying to purchase, refinance, or borrow against is not worth enough compared to the proposed loan amount.

Mortgage loan

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4. Other

Percentage of all denials: 12.9%
Total annual denials: 265,772
Percentage of home purchase denials: 13.2%
Percentage of refinancing denials: 12.9%
Percentage of cash-out refinancing denials: 15.0%
Percentage of home improvement denials: 12.0%

The “Other” category covers all other reasons that an applicant could be denied a home loan besides the eight covered by the Home Mortgage Disclosure Act and listed here.

Woman filling out paperwork

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5. Credit application incomplete

Percentage of all denials: 8.9%
Total annual denials: 183,024
Percentage of home purchase denials: 8.5%
Percentage of refinancing denials: 14.4%
Percentage of cash-out refinancing denials: 14.6%
Percentage of home improvement denials: 4.1%

Incomplete credit applications lack the necessary information for the lender to make a credit decision, resulting in a loan denial.

Tax forms

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6. Unverifiable information

Percentage of all denials: 6.7%
Total annual denials: 137,968
Percentage of home purchase denials: 8.9%
Percentage of refinancing denials: 5.8%
Percentage of cash-out refinancing denials: 4.5%
Percentage of home improvement denials: 6.4%

Mortgage denials due to unverifiable information often arise from inaccuracies in an applicant’s employment history or tax records or discrepancies between the application and credit report.

Writing a check

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7. Insufficient cash (down payment, closing costs)

Percentage of all denials: 4.0%
Total annual denials: 82,354
Percentage of home purchase denials: 8.6%
Percentage of refinancing denials: 4.0%
Percentage of cash-out refinancing denials: 4.4%
Percentage of home improvement denials: 1.4%

Mortgage applicants must have sufficient funds to cover down payments and closing costs and fees, or lenders may deny their application.

Woman learning on the job

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8. Employment history

Percentage of all denials: 1.8%
Total annual denials: 37,567
Percentage of home purchase denials: 3.9%
Percentage of refinancing denials: 1.4%
Percentage of cash-out refinancing denials: 1.6%
Percentage of home improvement denials: 1.0%

Mortgage lenders prefer that applicants have worked in the same field for at least two years. However, a new job is not necessarily a hurdle to securing a loan as long as it pays a steady salary.

Stressed out man

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9. Mortgage insurance denied

Percentage of all denials: 0.1%
Total annual denials: 1,665
Percentage of home purchase denials: 0.2%
Percentage of refinancing denials: 0.1%
Percentage of cash-out refinancing denials: 0.0%
Percentage of home improvement denials: 0.0%

Mortgage insurance protects the lender and allows borrowers making a down payment of less than 20% to still qualify for a home loan. Applicants who are denied mortgage insurance that need it are also likely to be declined for their loan.

Detailed Findings & Methodology

A low debt-to-income ratio (DTI) is the number one reason that mortgage applications are denied. Over 37% of denied applications had a low DTI as a reason for denial. This rate is constant across home purchase loans, refinancing loans, and home improvement loans. The second most common reason for mortgage application denials is credit history, accounting for almost 35% of denials. Indeed, credit history was a reason that almost 45% of home improvement loans were denied. The third most common reason for mortgage application denials is collateral, which was cited in about one out of five mortgage denials. Together, these top three reasons account for the vast majority of mortgage denials.

Less common reasons for mortgage denials are an incomplete credit application, unverifiable information, insufficient cash, employment history, and mortgage insurance denied. While most applications list one denial reason, some applications list two or more.

To find the top reasons mortgage loans are denied, researchers at Construction Coverage analyzed the latest data from the Federal Financial Institutions Examination Council’s Home Mortgage Disclosure Act. The researchers ranked reasons mortgage loans are denied according to the percentage of all denials mentioning each reason. For each reason that mortgage loans are denied, researchers also calculated the total annual denials and the percentage of denials that were due to that reason for several loan types: home purchase, refinancing, cash-out refinancing, and home improvement.

Only conventional, single-family mortgage applications were considered in the analysis. In the calculation of denial rates, withdrawn and incomplete applications were excluded.

Source: constructioncoverage.com

Don’t Swipe Your Credit Card Before You Apply for a Mortgage

Posted on April 29th, 2021

Large Credit Card Purchases Really Can Tank Your Credit Score

While missed payments are arguably the worst offense
Even racking up a lot of debt can lower your credit score significantly
So it’s best to put the spending on hold a few months before applying for a home loan
That way there won’t be any unwelcome surprises when it comes time to pull your credit

You’ve probably heard at some point that making large purchases with your credit card(s) before applying for a mortgage is a no-no.

In fact, you may have read that on this very site, since I’ve warned about it on numerous occasions in multiple posts because it’s such a common problem.

You might be aware of this issue, but shrugged it off, thinking what’s a few points, right?

You already have excellent credit so it doesn’t matter if you purchase a new $5,000 couch with your AmEx card for the new digs ahead of time.

Well, think again. It really does matter, and it can do serious damage to your credit score.

I’m not just talking about 5-10 points. I’m talking enough movement to potentially take you out of the running for a mortgage altogether, or at minimum raise your mortgage rate.

My Credit Score Got Rocked After Maxing Out a Credit Card

my score

I maxed out one of my credit cards a few years ago
And my excellent credit score dropped about 50 points seemingly overnight
That’s enough to raise your mortgage rate depending on how low your scores drop
Or worse, disqualify you from obtaining a mortgage altogether if your credit wasn’t great to begin with

Let’s take a look at a very real example; my credit score back in 2016. Yes, I’m using my own credit score to illustrate this very real problem.

Fortunately, I didn’t apply for a mortgage during this period so it wasn’t an issue for me.

Instead, it was a moral blow as I saw my near-perfect credit score drop from over 800 to the mid-750 range, which incidentally is still excellent credit.

But for those who followed my path and did apply for a home loan, it could have spelled serious, serious trouble.

For most of that year, my credit score had been stuck in a range from the low 800s to around 820. This was good because it meant I wouldn’t have any issues qualifying for a mortgage based on credit score alone.

Not only that, but I would have received the most favorable rates and avoided as many mortgage pricing adjustments as possible.

Once you get your credit scores above 760 there aren’t many pricing adjustments (if any) to worry about, so you don’t need perfection.

However, when the holidays hit I started making a lot of purchases on my credit card. There was a promotion with Discover and Apple Pay that offered 23% cash back on all purchases so I hit it hard.

I basically maxed out my Discover card, which had a pretty dismal credit limit (maybe only $5,000 or so) because Discover is a pretty conservative lender.

When all was said and done, I think I had 1% available credit on the card, otherwise known as 99% utilization.

This is not a good idea, especially before applying for a mortgage because it will literally tank your credit score, even if you pay off the balance in full by your due date.

The problem is that the credit bureaus will take a snapshot of your credit balances on a certain date and then compute your credit score based on that information.

Chances are TransUnion flagged this maxed out credit card and docked my score accordingly, basically assuming I was going down a bad path by making a ton of charges in a short span of time.

This is usually a signal that a consumer is in trouble financially, assuming the behavior continues. And the bureaus basically sent out an SOS to new lenders to proceed with caution.

In the matter of a couple months, my credit score fell nearly 50 points. From peak to trough, it fell a total of 65 points.

I went from having stellar credit to having very good credit. Still, my score was below 760, which could cost you on a mortgage.

Tip: If you must swipe, consider spreading the purchases across several credit cards to keep utilization rates on a per-card basis low. This may be less damaging than maxing out a single card.

The Good News Is I Bounced Back Pretty Quickly!

Thankfully my maxed out credit card was a short-lived event
My credit score bounced back fairly quickly once I paid off the credit card debt
So you can resolve it rather easily, assuming you have time to do so
But the takeaway is not to chance it because you might not always have time!

Now the good news. Once I paid my credit card bill in full, and the bureaus took note of the new $0 balance (this isn’t immediate), my credit score shot up to its highest point in the past 12 months.

My 758 credit score went all the way up to 826, not too far from the perfect credit score of 850. It was also the highest it had been since Credit Karma began keeping track of it a couple of years earlier.

So despite the big hit early in 2016, I wound up in even better shape than I had been to begin with.

This was great in hindsight, but had I applied for a mortgage at any time during that 30-45 day window, I could have jeopardized the entire thing.

For someone with a lower starting score, they could have knocked themselves out of eligibility, or at minimum been forced to take on a higher mortgage rate as a result.

Don’t Make the Same Mistake I Did If There’s Even a Tiny Chance You’ll Apply for a Mortgage Soon

If there’s any chance you’ll purchase a home or refinance an existing mortgage in the near future
Put all your credit cards away and avoid any unnecessary purchases
It’s just not worth the aggravation or the possibility of a higher mortgage rate and/or denied application
Just be patient and you can go back to spending once your home loan funds

The moral of the story is to heed the warnings of avoiding large purchases before taking out a mortgage. It’s no joke.

For the record, the same can be said of spending your cash because you’re depleting your assets if you make large cash purchases.

And you may need more money than anticipated for the down payment, reserves, and closing costs.

This is especially true nowadays with many homes going for above-asking.

Make sure you set aside lots of money in a verifiable account (like a checking or savings account) several months before you begin making bids or inquiring about a refinance.

Also note that the more outstanding debt you have on your credit card(s), the higher your debt-to-income ratio (DTI) will be.

And this just happens to be one of the main reasons why mortgages get declined.

So racking up credit card debt can hurt you in two different ways at the same time if you’re not careful.

In other words, practice frugality before and during the mortgage application process and until the loan is funded.

Those purchases can wait and you’ll be better for it.

After all, mortgages can stick with you for decades – you’d hate for one ill-timed purchase to haunt you for years to come.

Interestingly, once you get your mortgage, you might be able to pay it with a credit card, not that it’s necessarily a good idea either.

Read more: 10 Things You Should Do Before Applying for a Mortgage

Source: thetruthaboutmortgage.com

New Fannie/Freddie Refinance Option Drops Adverse Market Fee, Offers $500 Appraisal Credit

Posted on April 28th, 2021

In an effort to undo some of the damage the Federal Housing Finance Agency (FHFA) basically caused itself, it’s throwing a bone to so-called low-income families to save on their mortgage.

It all spurs from the adverse market fee the very same agency implemented back in August 2020 to contend with heightened losses related to COVID-19 forbearance and loss mitigation.

The 50-basis point fee, which went into effect on September 1st, 2020, applies to all new refinance loans backed by Fannie Mae and Freddie Mac.

While it’s not a .50% increase in mortgage rate, the fee does get passed along to consumers in the form of either higher closing costs or a slightly higher mortgage rate, perhaps an .125% increase all told.

Either way, it wasn’t well received at the time, and still isn’t today, and this announcement is a somewhat bittersweet one, as it only applies to a certain subset of the population.

Still, the FHFA believes families who are eligible for this new refinance initiative could see monthly savings between $100 and $250 on average.

Who Is Eligible for Adverse Market Fee Waiver and Appraisal Credit?

Applies to homeowners with incomes at or below 80% of the area median income and loan amounts at/below $300,000
Must result in savings of at least $50 in monthly mortgage payment, and at least a 50-basis point reduction in interest rate
Must currently hold an agency-backed mortgage (Fannie Mae or Freddie Mac)
Property must be a 1-unit single-family that is owner-occupied
Borrower must be current on their mortgage (no missed payments in past 6 months, 1 allowed in past 12 months)
Max LTV is 97%, max DTI is 65%, and minimum FICO score is 620

Perhaps the biggest eligibility factor is the borrower’s income must be at or below 80% of the area median income.

This new refinance program specifically targets what the FHFA refers to as low-income families, which director Mark Calabria said didn’t take advantage of the record low mortgage rates.

Apparently more than two million of these homeowners did not bother refinancing, even though it would have been advantageous to do so (and still is).

He noted that this new refinance option was designed to help eligible borrowers who have not already refinanced save somewhere between $1,200 and $3,000 annually on their mortgage payments.

That’s actually a requirement as well – the borrower must save at least $50 per month in mortgage payment, and their mortgage rate must be at least .50% lower.

For example, if your current mortgage rate is 4%, you’ll need a rate of at least 3.5% to qualify.

Additionally, you must currently have a home loan backed by either Fannie Mae or Freddie Mac, and your property must be owner-occupied and no more than one unit.

I assume condos/townhomes work as well, as long as it’s your primary residence.

The adverse market fee is waived as long as your income is at/below 80% of the area median AND your loan balance is at/below $300,000.

If your loan amount happens to be higher, my understanding is you can still get the $500 appraisal credit.

You’ve also got to be current on your mortgage, meaning no missed payments in past six months, and up to one missed payment in past 12 months.

Lastly, there is a maximum loan-to-value ratio of 97%, a max debt-to-income ratio of 65%, and a minimum FICO score is 620.

Most borrowers should have no issue with those requirements as they are extremely liberal.

Is This New Refinance Option a Good Deal for Homeowners?

It’s an excellent deal for those who haven’t refinanced their mortgages yet
You get a slightly lower mortgage rate and/or reduced closing costs
And with mortgage rates already super cheap it could be a double-win to save you some money
Even though who don’t qualify for this new program should check to see if a refinance could be worthwhile

As Calabria said, many higher-income homeowners probably already refinanced, or are currently refinancing their mortgages to take advantage of the low rates on offer.

Meanwhile, lots of lower income borrowers haven’t for one reason or another, perhaps because they’re not aware of the potential savings or had a bad experience with a mortgage lender in the past.

Whatever the reason, those who haven’t yet and meet the income requirement can take advantage of a refinance without the pesky adverse market fee.

That means they could get a mortgage rate maybe .125% lower than other borrowers who aren’t eligible for this program.

Additionally, they’ll get a $500 home appraisal credit from the lender, assuming the transaction doesn’t already qualify for an appraisal waiver.

Either way, eligible homeowners won’t have to pay for the appraisal, which is another plus to save on the refinance itself via lower closing costs.

It’s actually a great deal for those who haven’t refinanced yet because you might wind up with an even lower mortgage rate and reduced closing costs.

And because your new mortgage payment must be at least $50 cheaper per month, there’s less likelihood of it being a meaningless refinance.

All in all, this is good news for the so-called low-income homeowners who’ve yet to refinance, but bittersweet for everyone else.

Still, mortgage rates remain very attractive for everyone, so even if you have to pay the adverse market fee (and the appraisal fee), it could be well worth your while.

The FHFA said the new refinance option will be available to eligible borrowers beginning this summer, though it’s unclear exactly what date that is as of now.

Read more: When to a refinance a mortgage.

Source: thetruthaboutmortgage.com

A Long Mortgage Process Can Be Your Friend or Your Worst Enemy

Posted on August 17th, 2012

Let’s face it, these days it takes a while to get a mortgage. And by a while, I mean months in some cases.

Why? Because everyone and their mother is well aware of the record low mortgage rates, and they all want a bite.

As a result, both purchase and refinance transactions are averaging 48 days to close as banks and lenders merely try to keep up with demand.

This means once you submit your loan application, it will take an entire month and a half to actually close the deal, if you’re lucky.

Obviously this is more important for purchase transactions, as they are more time-sensitive, but timing is very important when it comes to refinancing as well.

Mortgage Rates Subject to Change

When you see a certain mortgage rate advertised online or on TV, you must take it with a large grain of salt.

First off, it’s a perfect-scenario rate for someone that meets certain requirements, such as having a great credit score, a large down payment (or low LTV ratio), and a loan amount below the conforming limit.

Assuming you meet all those requirements (and more), that rate may still be out of reach for one reason or another, one being time. In short, a rate you see today may not be available tomorrow.

That brings us back to that 48 days to close situation. Per the latest Origination Insight Report from Ellie Mae, refis averaged 48 days to close in July, while purchases averaged 47 days.

These numbers have been inflated for the entire year now, and loan originators are swamped trying to get all those applications funded. While they’re working to fund your loan, don’t expect mortgage rates to stand still. Instead, expect a roller coaster ride at best.

Who’s Hurting?

Well, in the past couple weeks mortgage rates have been trending up after touching all-time lows.

As a result, those who submitted loan applications a month or so ago may be in for a rude awakening.

For example, they may have submitted their loan when the 30-year fixed was averaging close to 3.5%, only to find rates have climbed to 3.75% today.

If it’s almost time to close, they’ll have no choice but to take the higher rate (or buy down their rate). A higher rate could also jeopardize their approval if it swings their DTI ratio too high.

Clearly this isn’t ideal, but this is why savvy borrowers lock their rate instead of floating it when rates are attractive.

So those who got greedy or simply didn’t think to lock might be bummed out.

Is Now the Time to Wait?

Because mortgage rates have been climbing steadily on what appears to be no news, we’re probably due for a correction sometime soon.

After all, the economy hasn’t exactly proven itself, and Europe isn’t out of the woods. It seems their latest move is to just keep quiet and hope no one notices what’s really going on.

It certainly seems to be cyclical, with bad news and good (or no news) coming in and out, pushing mortgage rates up and down.

At the moment, we’re in an uptrend, so those who just submitted loans may want to wait it out until things improve again. Heck, you’ve got more than a month to decide.

Sure, you run the risk of mortgage rates climbing even higher by the time you close your loan, but with no great news out there, there’s a good chance rates could trend back down to where they were a month ago.

All that said, make sure you consider timing when submitting your loan. Ask your bank or broker how long it will take to close, and plan accordingly to ensure you get the rate you want.

For the record, the closing rate has been pretty dismal of late. Only 37.9% of refis and 58.7% of purchases actually closed(within 90 days), meaning plenty of loans are getting denied for one reason or another.

Read more: Reasons why your refinance was denied.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

How Do Student Loans Affect Your CreditÂ

Student Loans & Credit Scores As a young person just out of college, you might be wondering, how do student loans affect your credit? Well, the impact of these loans can either be positive or negative. It all depends on how you manage the loan’s repayment.

While in college, the loans may quite helpful, but after graduating, everything changes. Missed repayments will start eating away on your financial life. On the other hand, timely repayments will see you off to greater financial freedom. For more on this, here are the ways in which student loans affect your credit.

The Positive Effects

– They Give You a Long Credit History

Your credit history length plus your accounts average age are some of the things that impact your credit score. The length of credit history has a 15% influence on your score.

With student loans having payment plans extending up to 10 years, your score will certainly be boosted if you make the payments as required. However, you should aim to repay the loans in a shorter period to reduce the payable interest.

– Making On-Time Monthly Payments Will Boost Your Score

Your payment history on student loans accounts for 35% of your score. If your payments are timely and the required minimum is met, your score will soar.

For better scores, pay more than the minimum monthly payment. Think of this as paying forward- enabling you to enjoy lower rates on future loans like mortgages.

– Student Loans Can Help You Establish Your Credit Score

For many young people just fresh out of school, student loans help you in getting your credit file opened. This information will be used by credit bureaus in scoring you. This will keep you from joining the millions who are “Credit Invisible”.

Without this file or data, creditors won’t have a base on which to grade your creditworthiness. You may end up paying more on rent, car rates and so on.

– Student Loans Help In Building your Credit Mix

Credit mix refers to the different lines of credit that you take over a period of time. For example car loans, credit cards, and mortgages among others. A healthy credit mix is very good for your credit; 10% of your credit score will be judged on it.

The Negative Effects

– Late Payments Damage your Credit

Late payments are reported to credit bureaus and will stick in your report for at least 7 years. This will definitely lower your credit score. Also, they will attract late fee charges from your loan servicer. If you have numerous loans with the same creditor, a missed payment on one loan will reflect badly on all the loans.

Student loans might also put you into financial pressure. This can lead to late payments on other loans such as credit cards, wrecking your score further.

– Defaulting can Lower your Access to Credit

To lenders, late payers are tolerable compared to defaulters. Defaulters make creditors lose money. As a person paying a student loan, you should never default.
For a missed payment to be considered defaulting, it must be over 270 days. After this period, the total amount of your student loan will be due from that point onwards. A default remains on your credit report for 7 years from the default date.

What does this mean? For 7 years your credit access chances will be very low. No creditor will want to take a risk with you. You should never allow your account to be in collections.

– High Balances will Increase your DTI

Getting approved for new credit is hard if one has high balances on an existing loan. All this has to do with your debt-to-income (DTI) ratio, i.e. the fraction of your total monthly income that is meant for to debt repayment.

If your debt-to-income ratio is high, it shows you are not very committed to resolving your situation hence creditors avoid you. Additionally, DTI has a 30% influence on your credit score.

Final Word

Fortunately, when it comes to creditworthiness, the influence of installment loans such as student loans is not as strong as that of revolving credit. If you’ve mishandled your student loans, it high time to start making payments and save your scores. Also, by clearing these loans, the negative impact they have on your credit score will start fading away over time.

Source: creditabsolute.com

Facts About Using a Co-Signer on a Mortgage

If you’re thinking about buying a home with a co-signer, be sure you know what that means for both you and them.

Do you need a co-signer to buy a home? To help you decide, let’s review the reasons you might use a co-signer, the types of co-signers, and the various requirements lenders have for allowing co-signers.

When to use a co-signer

Many young professionals ask their parents to co-sign while they’re ramping up their income. Other lesser-known but still common scenarios include:

Divorcees use co-signers to help qualify for a home they’re taking over from ex-spouses.
People taking career time off to go back to school use co-signers to help during this transitional phase.
Self-employed borrowers whose tax returns don’t fully reflect their actual income use co-signers to bridge the gap.

Before using a co-signer, make sure all parties are clear on the end game. Will you ever be able to afford the home on your own? Is the co-signer expecting to retain an ownership percentage of the home?

Types of co-signers

There are two main types of co-signers: those that will live in the home, and those that will not. Lenders refer to these as occupant co-borrowers and non-occupant co-borrowers, respectively.

Non-occupant co-borrowers are the more common category for co-signers, so the lender requirements summarized below are for non-occupant co-borrowers.
Occupant co-borrowers who are co-signing on a new home can expect lenders to scrutinize the location and cost of their current home, and should also expect post-closing occupancy checks to verify they’ve actually moved into the new home.

Ownership considerations for co-signers

Lenders require that anyone on the loan must also be on the title to the home, so a co-signer will be considered an owner of the home.

If borrowers take title as joint tenants, the occupant and non-occupant co-borrowers will each have equal ownership shares to the property.

If borrowers take title as tenants in common, the occupant and non-occupant co-borrowers can define their individual ownership shares to the property.

Financial considerations for co-signers

Lenders allow occupant and non-occupant co-borrowers to have different ownership shares in the property because the Note (which is the contract for the loan) makes them both equally liable for the loan.

This means that if an occupant co-borrower is late on the mortgage, this will hurt their credit and the non-occupant co-borrower’s (aka the co-signer’s) credit.

Another co-signer risk is that the co-signed mortgage will often count against them when qualifying for personal, auto, business, and student loans in the future. But the co-signed mortgage can sometimes be excluded from future mortgage loan qualification calculations if the co-signer can provide documentation to prove two things to their new mortgage lender:

The occupant co-borrower has been making the full mortgage payments on the co-signed loan for at least 12 months.
There is no history of late payments on the co-signed loan.

Lender requirements for co-signers

Occupant co-borrowers must have skin in the game when using a co-signer, and lender rules vary based on loan type and down payment. Below are common lender requirements for co-signers. This list isn’t all-inclusive, and conditions vary by borrower, so find a local lender to advise on your situation.

For conforming loans (up to $417,000, and high-balance conforming loans up to $625,500 by county), Fannie Mae and Freddie Mac will allow for the debt-to-income ratio (DTI) to be calculated by simply combining the incomes of the occupant and non-occupant co-borrower. This is known as a “blended ratio,” and is especially helpful when the co-signer has most of the income.
Conforming loans will require at least a five-percent down payment to allow a co-signer.
For conforming loans with less than 20 percent down, lenders will require at least five percent of the down payment come from the occupant co-borrower. Flexible programs like Fannie Mae HomeReady loan allow blended ratios for co-signers, and go further by allowing income of people who won’t even be on the loan but that will verify in writing that they’ll be living in the home with you for at least 12 months.
Some jumbo loans above $417,000 (or above the conforming high-balance limit by county) will allow blended ratios for qualifying with co-signers. Your lender will advise based on your down payment, reserves left over after the loan closes, loan amount, credit score, and other components of your profile.
Many jumbo loans allow for the occupant co-borrower’s DTI to go as high as 50 percent when using a co-signer, but in most of these cases, at least 10 percent of the down payment must come from the occupant co-borrower.
Select jumbo loans allow for the occupant co-borrower’s DTI to go as high as 75 percent when using a co-signer, but there will be many other requirements, and the rates won’t be as competitive.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

What Mortgage Term Is Best?

Mortgage Q&A: “What mortgage term is best?”

Before you set out to snag the lowest rate on your purchase mortgage or mortgage refinance, you’ll need to decide on (or at least narrow down) a mortgage term.

I’m referring to the amount of time it will take to pay off your home loan in full.

The “mortgage term” is essentially the duration of your mortgage, whether you actually keep it for that length of time or not.

Let’s talk about why it matters and what factors may sway your decision in this department.

Choosing an Appropriate Mortgage Term

long term vs. short term

One thing you’ll need to decide on when taking out a home loan
Is the duration of the mortgage, known as the “loan term”
This is how long it will take to pay off the mortgage in full
Based on regular monthly principal and interest payments

First off, your mortgage payments and the amount of interest you pay will be determined, in large part, by the term of your mortgage.

For example, a 15-year mortgage is paid off in half the amount of time as a 30-year mortgage, so the monthly mortgage payment will be much higher.

It won’t be double the amount of the 30-year because you’ll pay less interest over a shorter period of time, but it’ll be significantly higher.

Generally, you’re looking at a mortgage payment that is 1.5X that of the 30-year term mortgage.

This can obviously stretch a budget thin, so it’s important to decide on term before shopping to ensure you wind up with the right loan program to fit your unique financial profile.

The 30-Year Mortgage Term Is Standard

mortgage terms

The 30-year fixed mortgage is the most popular loan program available
It features a 30-year loan term and a fixed rate for the entire duration
Most ARMs also have a 30-year term despite coming with adjustable interest rates
However there are plenty of other terms available too so be sure to explore all of them!

Most mortgages are based on a 30-year amortization, meaning they are paid off in full after 30 years.

At the same time, not all 30-year mortgages are fixed for 30-years.

That’s right, there are a ton of mortgages based on a 30-year payoff schedule that can adjust monthly or annually for much of that time.

A common example would be the 5/1 adjustable-rate mortgage, which is amortized over and due in 30 years, but adjustable after just five.

It’s fixed for the first five years, and adjustable for the remaining 25, but still a 30-year term loan.

Same goes for a 7/1 or a 10/1 ARM, except their fixed period is seven or 10 years, respectively, before going adjustable.

15-Year Mortgage Terms Are Also Very Common

Aside from 30-year terms, 15-year terms are the next most common
They require much higher monthly mortgage payments
As a result of the shorter amortization period
But can result in big savings and lower interest rates

Then there are 15-year term mortgages, which are amortized and paid off in 15 years.

They too are fixed for the entire duration, so you don’t have to worry about your mortgage rate adjusting higher (or lower, not that you’d be concerned about that).

These are a great choice if you want to pay off your mortgage early, assuming your money isn’t better served elsewhere.

With a 15-year mortgage, you’ll enjoy a lower mortgage rate than a 30-year loan, and pay much less interest. A win-win really.

Let’s look at an example, assuming the loan amount is $200,000.

30-year payment: $998.57 (4.375% rate)
Total interest paid: $159,485.20

15-year payment: $1,429.77 (3.50% rate)
Total interest paid: $57,358.60

As you can see, the interest rate is 0.75% lower on the 15-year term loan.

This isn’t unusual because lenders are willing to offer a discount to homeowners who pay off their mortgages faster.

If you need three decades to pay off your mortgage, and want a fixed interest rate for that entire time period, you’re going to pay extra for it via a higher mortgage rate.

Anyway, the 15-year mortgage would save you roughly $100,000 in interest over the full loan term, but your monthly mortgage payment would be about 50 percent higher.

If you could handle it, and actually want to pay down your mortgage, it’d be a worthwhile move, especially if you happened to be refinancing from a higher rate.

For example, if you rate was 6.5% on a 30-year term, refinancing to a rate of 3.5% on a 15-year term today would only be an additional $200 a month.

That’s a pretty good tradeoff for a relatively small bump in monthly payment.

Someone looking to retire who wanted to own a home free and clear could be a candidate for a shorter-term mortgage.

Same goes for someone living in an area of the country where home prices aren’t too high. The difference in monthly payment might be relatively negligible.

[30-year fixed vs. 15-year fixed]

What Other Mortgage Terms Are Available?

Other mortgage terms include 10-, 20-, 25-, and 40-year terms
But not all banks and lenders offer these options
You may also be able to choose your own home loan term
Where you can pick any loan term you like

Mortgage terms don’t stop at 30 and 15. There are plenty of other options, including 10-year, 20-year, 25-year, 40-year, and even five-year terms.

Yep, you can pay your mortgage off in just 10 years or stretch it out to 40 years if you need a little more time.

The longest mortgage term I’ve seen was 50 years, but that was gimmicky and short lived, for good reason.

If 15 years is too quick, but 30 is too long, there’s always the 20-year mortgage.

There are even mortgages amortized over 40 years that are due in 30, so the options are endless really.

The five-year term refers to balloon mortgages where the loan is due in full after just five years.

Of course, they’re set up so borrowers refinance/sell at that time, and they’re amortized over 30-years, making them affordable on a monthly basis.

The shortest mortgage term where the loan is actually paid off in full would likely be the 10-year fixed mortgage.

As the name indicates, it has an interest rate that doesn’t change and is paid off in just a decade.

While it might be offered by certain lenders, it could well be out of reach for most homeowners because mortgage payments will be roughly double that of a 30-year loan.

Note: Mortgages with terms longer than 30 years and balloon mortgages have essentially become fringe products because they fall out of the so-called Qualified Mortgage (QM) definition that affords lenders extra protections.

Average Mortgage Term Is Much Shorter

Most homeowners don’t keep their mortgages full-term
Instead they’re often kept for less than a decade
So consider that if you want to save some money
You might be able to go with a cheaper ARM instead

Keep in mind that most people only hold onto their mortgages for about seven to 10 years.

This is a result of either selling the home and moving on, or refinancing the existing mortgage to take advantage of lower mortgage rates, or to get cash out.

So whatever mortgage term you choose, be sure it makes sense for your particular situation, and also from both a mortgage rate and monthly payment perspective.

How Long Should Your Mortgage Term Be?

Consider how long you plan to keep the property in question
Affordability may also dictate loan term choice
Those moving relatively soon may be benefit from an ARM with a 30-year term
While those purchasing forever homes who can afford it may want a 15-year fixed

Ultimately, most homeowners are going to go with a 30-year term, and in all likelihood, a 30-year fixed.

It commands something like a 90% market share for purchase mortgages and 75% share for refinances.

But that doesn’t necessarily mean it’s the right loan choice for all these borrowers.

If you think you may move in just a few years, perhaps because you bought a starter home, the 30-year fixed may actually be a bad choice.

After all, the interest rate will be higher and the benefit (of the fixed interest rate) not fully realized if only kept a few years.

Conversely, don’t go after a 15-year term if you think you’ll have a tough time making the larger payments.

For many, this might not even be an option due to DTI constraints, which limit how much you can borrow.

Similarly, you may not want to pick a 20-year term or 25-year term over a 30-year loan if the rate isn’t significantly better (or at all different) and affordability is a concern.

You can always pay extra on your mortgage later to save money on interest and whittle down the loan term.

How to Change Your Mortgage Term

If you want to decrease or increase your loan term
A standard refinance will likely be your best option
Many homeowners switch from 30-year to 15-year term loans
To stay on track and obtain lower interest rates

So we know the typical mortgage term is 30 years, but what if you want to change the length of your mortgage?

Let’s say you were a first time buyer, and like 90% of other home buyers, went with a 30-year fixed.

One day you tinker around with a mortgage calculator and realize you’re going to pay hundreds of thousands dollars in interest and not pay off your loan until you’re 70.

Now what? Panic, bury your head in the sand? No. Do something about it, assuming you want to.

The easiest and most straightforward method is to execute a rate and term refinance. Notice it says term right in the phrase…

While refinancing to a lower interest rate can result in monthly payment savings, going from one 30-year loan to another means you’re resetting the clock.

By this, I mean getting even further away from paying off your mortgage in full.

What some savvy homeowners do is refinance from a 30-year term to a 15-year term. That way they don’t extend their loan term, and in some cases actually shorten it.

As noted, mortgage rates are also cheaper on 15-year mortgages, so the savings can be two-fold.

If you can’t or don’t want to refinance, you can also just pay extra each month to effectively shorten the loan term.

To summarize, the longer the loan term, the lower the mortgage payment, but the more interest you’ll pay, and the longer it will take to build home equity.

Further complicating matters is the fact that some folks don’t want to pay off their mortgages, and would rather invest their money elsewhere.

Either way, make a plan and think about what your short-term and long-term goals are before diving in.

Tip: If you aren’t sure what loan term to pick, you can always make larger payments on a longer-term loan (biweekly mortgage payments).

If you go with a shorter term, you’re stuck with a larger monthly payment no matter what.

To err on the side of caution, you can go with the standard 30-year term and make extra principal payments if and when you desire.

Source: thetruthaboutmortgage.com

Why a Low Down Payment Mortgage Might Be the Safer Move

Posted on July 30th, 2019

If you ask most people, they’ll probably say you should save up a good chunk of money before buying a home, possibly even 20% of the purchase price.

A mortgage underwriter might share similar sentiment, even if their very own loan programs allow for low or even zero down payments.

The general thinking is that someone who puts down more money has skin in the game, and is therefore a lower default risk.

They won’t want to miss their mortgage payments and in the process lose their home, the equity they’ve accrued, and the down payment they plunked down with it.

But a new study from the JPMorgan Chase and Co. Institute reveals that liquidity appears to be more important than equity, income, or payment burden.

Money in the Bank More Important Than Down Payment

If you put a large amount down when buying a home
Be sure not to overlook the many closing costs involved
While the monthly payment will be cheaper if you put more down
You might not have a lot set aside if things go wrong

When you purchase a home, it comes with lots of closing costs, ranging from appraisal and inspection fees, title and escrow charges, lender fees, moving fees, new furniture, renovations, and so on.

It can be quite the financial hit, which explains why mortgage lenders often require asset reserves to ensure you can make your mortgage payments for a few months if money gets tight.

Those who put down say 20% or more might feel an even bigger pinch, once you factor in those other costs mentioned.

For example, someone buying a $500,000 home would have to fork over $100,000 from their bank account, along with thousands more in upfront closing costs.

Then you’ve got the moving costs, the renovations, the new couch and big screen TV, the monthly utility bills, and last of all the higher housing payment via your new mortgage, which includes taxes and insurance.

Someone who purchases that same $500,000 home with just 3% down would only have to come to the table with $15,000 plus the closing costs and other expenses mentioned.

That’s a stark difference in terms of having an emergency fund if things go sideways.

The downside for the low down payment mortgage borrower is their monthly payment will be higher.

As I’ve said before, there are three things that can raise your mortgage payment if you put down less than 20%.

They include mortgage insurance, a higher mortgage rate thanks to additional pricing adjustments, and a larger loan amount.

But in many cases, the monthly payment difference might not be all that significant in the grand scheme of things.

And for many folks, a slightly larger monthly payment may not be a deal breaker.

It is often the lack of savings that seems to be the biggest problem for Americans. So giving it all away to the bank on day one could lead to trouble.

When It Comes to Mortgage Default, Liquidity Is King

defaults and liquidity

Now back to that study from Chase, which was authored by Diana Farrell, Kanav Bhagat, and Chen Zhao.

The trio found that borrowers who had little set aside post-closing defaulted at a “considerably higher rate” versus borrowers who had the equivalent of at least three monthly mortgage payments in the bank.

Specifically, those with less than one month of reserves defaulted at a rate of 1.8%, six times higher (0.3%) than the borrowers with between three and four months’ reserves.

They also discovered that homeowners with low liquidity but more equity defaulted at “considerably higher rates” than those with more liquidity but less equity.

And payment default was often the result of a loss of liquidity, regardless of the borrower’s home equity position, income, or payment burden.

The group also noted that loan modifications resulting in increased borrower liquidity reduced default rates, whereas mods that simply increased borrower equity (but left them underwater) didn’t impact default rates.

An Emergency Mortgage Reserve

Instead of exhausting all of your liquidity when taking out a mortgage
The authors suggested setting aside a small amount in an emergency mortgage reserve fund
That way you’ll have a few months covered if you run into trouble
It could allow you to get back on your feet and avoid default

So what does it all mean? Well, the authors have suggested an interesting pilot program where borrowers could put a little less money down and send the residual cash to a so-called “emergency mortgage reserve.”

They argue that the existence of such a fund could produce lower default rates, and even serve as an alternative to measuring a borrower’s ability-to-repay using their total debt-to-income ratio (DTI).

Whether that happens or not, it brings up a good point for those grappling with what to put down on a house.

Ultimately, you’ve got a lot of choices these days, ranging from zero down in some cases to 3-3.5% to 20% down or more.

While lenders do often require borrowers to show that they have a couple months of reserves (PITI) in bank, you could well use that money to buy a couch (or anything else) after closing.

And if you parted with much or all of your hard-earned savings, it could be very easy to get into trouble quickly.

Even if your mortgage payment is higher, there is an argument to put down less in certain situations if it’ll mean you’re protected in the event your finances take a hit.

Sure, you could make the point that someone shouldn’t be a homeowner to begin with if they can’t manage 20%, or at worst 10% down, but reality is a lot different.

Last year, I noted that nearly half of home purchase mortgages were considered “low down payment,” defined as a down payment below 10%.

My guess is this isn’t going to change anytime soon, especially as home prices continue to rise.

If you’re unsure of what to put down, do the math and determine how much you’ll have leftover when all is said and done.

Even if the bank only requires you to have a couple months’ reserves, it might be prudent to come up with a down payment that leaves a little bit extra in the event you hit a snag.

Source: thetruthaboutmortgage.com

How Much Can You Afford and What Will It Get You?

When it comes to buying a house, the numbers get so big they can start to lose meaning. You may pass on $2 generic toothpaste in favor of the $2.25 brand-name, but zeros can really add up when it comes to a home. You can’t buy a $225,000 home on a $200,000 budget, even if you do stick with that bargain-brand toothpaste and amortize it over 30 years.

So how much house can you afford? What will that get you in your local market? Today, fortunately, it’s easier than ever to get those answers.

Doing the math

The first question used to be answered with scribbled calculations done while hunched over a dining room table. Things are much easier now. You can simply plug some numbers into an affordability calculator and voila! You’ll have your answer. Of course, you’ll need to know what numbers to enter. You’ll start with your gross annual income.

Then plug in any debt you currently owe, including car payments, student loan payments, existing mortgage payments that you will continue to owe, child support, alimony and minimum monthly payments on credit cards. You don’t need to worry about things like utilities and food – the calculator already assumes you’re going to need to eat and use lights and even buy clothes and entertainment. Finally, enter how much you’ve saved toward a down payment. The affordability calculator will tell you what you can afford to spend.

Your DTI

What you’re really looking at (and what lenders are going to be very interested in seeing) is your DTI or Debt to Income ratio. If you want to see how that figure shakes out for you, try the DTI calculator. Once you’re done you’ll know exactly what percentage of your income goes to paying off existing debt.

You can also check out the mortgage calculator to get an estimate of your monthly mortgage payment if you buy a home at that price. Then you can fiddle around with different interest rates and see what a 15-year loan would look like compared with a 30-year loan, or what spending a little less would look like in your monthly budget. The interest rate you’ll pay for your mortgage can have a big impact on your affordability. You can get real-time rate quotes from multiple lenders on Zillow by entering details such as your income, home purchase price, and credit score, to see exactly what interest rate you will qualify for. Having real numbers to look at will help make taking the leap a whole lot easier.

The marketplace

So now you know what you can afford, the next question is what will that buy in your market? The same payment that would buy you a mansion in Moline won’t get you a shack in San Francisco. But once again, you’re armed with an impressive array of research to help you. Zillow Research is like having your own staff of economists to help gather and decipher housing data from around the country. For instance, instead of driving around looking at asking prices or relying on the advice of friends and family who might have bought a house in a vastly different market, you can simply look up the local market reports for the area you are interested in.

In addition to the table covering the 35 largest metros in the U.S., you can see more detailed reports for locations in every state. Don’t see your city listed? Open the report for the city nearest you – you may find your exact town covered within the report. At the very least, you’ll get an idea of what’s happening nearby, which is usually a pretty good indication of what’s happening in your market. Of course, an even simpler way to get an idea of prices is to plug your city and state or ZIP code into the Zillow home search and see what’s available and at what price.

The other thing you’ll want to consider is what kind of market are you buying into. Is it a buyers market, a sellers market or neutral? You can get a pretty good idea by looking at the market reports for your area. Rising values and dropping inventory puts sellers in the driver’s seat. Stagnant or even lowering prices with increased inventory puts buyers in charge.

If it’s a sellers market, prepare yourself for a challenge. You may make several offers to buy a home before one is finally accepted. You may find yourself having to offer above asking price just to be considered. Don’t let a few disappointments pressure you into jumping into a home that doesn’t really fit your needs. At the same time, you aren’t going to have time to sleep on it if you find a home you love in a hot seller’s market. But with all your savvy market research and knowledge, that won’t be a problem.

Source: zillow.com

3 Easy Tips: How To Increase Credit Card Limit

You’ve been making your monthly payments, staying within your current credit limit, and crossing your fingers that your credit card company decides to increase your limit.

Maybe you’re making plans to take that month-long Europe trip you’ve been dreaming about, and you want to score some travel points by making a few big purchases on your new card. Or perhaps you’re working on improving your credit score and just need a little credit limit boost to work your way toward financial wellness.

An increased credit limit is not only a reward from your credit card company— it’s also an opportunity for you to continue to prove your financial stability.

Increasing your credit card limit isn’t always easy. That’s why we’ve put together three easy tips to show you how to get a higher credit limit.

Wait for an Increase to Occur Naturally
Request a Credit Limit Increase
Apply for a New Card With a Higher Credit Limit

What Is a Credit Limit & Do I Qualify For a High Credit Limit?

Before diving in on how to raise your credit limit, it’s important to understand exactly how credit works. Your credit limit is the maximum amount of money you are allowed to spend on a given credit card. To determine this amount, credit card companies evaluate your spending and debt management habits to offer you a line of credit they believe you will pay back.

The same process is applied when they consider you for an increased credit limit. The increase percentage varies for each individual, and each credit card company has different qualifications for credit card limit increases.

Credit limits are generally determined by:

Payment History

Your payment history is one of the most important factors when it comes to responsible credit card usage. Making sure you make all your payments on time will help keep you on the good side of your lender or credit card company.

So how does this translate? Having a positive payment history will make you a better candidate for getting a credit card limit increase.

Your Debt-To-Income (DTI) Ratio

Debt-To-Income (DTI) ratio is all of your monthly debt payments compared to your gross monthly income. The Consumer Financial Protection Bureau says that it’s best to keep your DTI below 43%, especially if you’re trying to qualify for a new line of credit, or are working toward a credit limit increase.

You can calculate your own DTI by dividing your total recurring debt by your gross monthly income, and multiplying the result by 100.

If your DTI climbs above 43%, don’t worry—it’s repairable. Work toward paying off your debts and limiting your spending to chip away at your DTI may improve your credit standing.

Your Existing Credit Limits and Credit Utilization

When evaluating your eligibility for a higher credit limit, your credit card company will look at how much of your credit you’re currently using. If you’re having to rely on your credit card a lot and are regularly approaching your credit maximums, you may be less likely to be approved for an increase in your credit limit.

Keeping your credit utilization low will make managing your finances easier—and may be the key to getting you approved for a credit limit increase.

Your Credit Score

Your credit score is the general picture of your financial health. When lenders make any decisions about increasing your line of credit, they will definitely look at your current credit score. It’s a good idea to know where your credit stands by checking your credit score for free with a service like Turbo.

Knowing how to interpret your credit score can also give you a good idea of where you stand with your credit, and can help guide you toward securing a higher credit limit.

Those three magic numbers can have a big impact on many major life decisions,such as buying a home or getting a loan for a new car. Having a good credit score will not only help you meet those milestones, but can also expand your financial freedom.

So, what makes a good credit score? Using the VantageScore credit model, lenders consider scores above 781 to be excellent credit—while the 661-780 range can be considered decent or good credit. Maintaining a credit score within these ranges will help you stay in good standing with lenders and credit card companies where you want to secure an increased limit. If your credit dips below the 661 range, make sure to act on poor credit with consistent, on-time payments, and work hard to chip away at that debt that’s anchoring you down.

How To Get a Higher Credit Limit

Securing a higher credit limit can sometimes happen automatically with excellent credit history, but you may need to ask your credit card company to be approved. Take a look at these three options for increasing your credit limit.

1. Wait For an Increase to Occur Naturally

If you’ve demonstrated good behavior with your existing card, your credit card company may decide to approve you for a credit limit increase automatically.

Credit card companies will likely wait 6-12 months after you’ve opened your account to see that you are able to make your payments on time and manage your debts responsibly. If you’re able to make more than your minimum payments, this will demonstrate good payment habits, and also help you avoid interest fees.

If they decide to increase your limit, your credit card company will notify you of your credit limit increase. They may increase it automatically or on your next billing cycle. If you have any questions regarding your credit limit, it’s best to call the phone number on the back of your credit card.

Once you’ve received a credit increase, it’s only human that you would celebrate your success. It takes a lot of responsibility and willpower to manage your credit well enough that your credit card company rewards you automatically. However, be careful not to overspend on your celebrations. It’s easy to jump back into overspending once you’ve reached a new credit limit—which may end up hurting you later down the road.

2. Request a Credit Limit Increase

If you’re depending on a credit limit increase to help fund a big purchase you’ve already started budgeting for, talking with your credit card company may help you get an increased credit limit.

You can request a higher credit limit in a few different ways. Take a look at these two options to help you decide what works best for you and your credit card company.

Make a Request Online

Many credit card companies make requesting a credit limit increase easy by allowing you to fill out a request form online.

Some companies like Chase will make an instant decision following your request to increase your credit limit. Simply sign in and fill out the required information to get your result.

If you’re not approved right away, continue to follow good credit management practices and you may be able to apply again in the future.

Call Your Card Issuer

Another option to request an increase in your credit limit is to call your creditor directly.

Dial the number on the back of your credit card to speak with a representative about your credit card limit. Have your credit report and a record of your payment history handy as testaments to your responsible credit management habits.

If you were approved for an increase, it’s likely you have a good credit score and history, so keep up the good work!

3. Apply For a New Card With a Higher Credit Limit

Check your credit score

Evaluate your payment history and existing credit score. If you know your current credit standing, you’ll be able to zero in on which credit card options may be best for you – and which you’ll qualify for.

Do your research

Generally, you can find information online that indicates exactly which qualifications you need in order to be approved for a specific credit card. If your credit score falls within a specific card’s qualifications, it may be worth applying. It’s important to check this information before applying to avoid hard credit inquiries dinging your score.

Maintain Good Credit Card Practices

Before applying for a new credit card or asking for a credit limit increase, learn how to manage your credit responsibly. Just one slip-up on payments or overextended credit usage could negatively impact your credit score.

Conversely, if you pay on time and keep your utilization ratio low, you may find it’s smooth sailing to a higher credit limit.

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