The day has come: It’s time to buy a home. For
Getting a great rate on a mortgage is about a lot more than comparison shopping. It’s also about much more than just your credit score. In fact, the mortgage industry examines a number of factors to determine not only if you qualify for a mortgage, but also what interest rate you’ll pay.
There’s a lot at stake. Mortgage rates can vary by several percentage points depending on the factors we’ll look at below. The difference can mean a much higher or lower monthly payment and tens of thousands of dollars in interest payments over the life of the loan.
Here’s how to get the best mortgage rate:
Mortgage lending today is based on tiered pricing, which means that rates are adjusted based on various criteria. One of the main criteria used is your FICO credit score. Your credit score will help to determine whether you qualify for the loan and what rate you’ll pay on your loan, and there is an inverse relationship. The higher your credit score, the lower your mortgage rate, all other things being equal.
A higher credit score shows banks that you’re less of a risk to default on your loan, which means you’ll pay less to borrow money. If you don’t meet the minimum credit score requirements, or if you want to improve your chances of getting the best rates, you’ll need to begin monitoring your credit scores and making improvements where necessary.
Mortgage lenders prefer candidates that can prove steady employment for at least the past two years. They’ll want to see pay stubs and W-2s. Those who are self-employed, or wrapped up in the gig economy, will have a more difficult time.
Long periods of unemployment won’t bode well for your application, and neither will a pattern of declining earnings. In a perfect world, you have been on the same job for at least the last two years, or have made a job change to a higher paying position in that time.
Debt-to-income ratio – also called DTI – comes in two forms. The back-end ratio measures the total of all of your monthly minimum debt payments, plus your proposed new housing payment, divided by your stable monthly gross income. The front-end ratio focuses just on your housing costs, excluding all other debts. Historically, banks have wanted to see a front-end ratio of no more than 28% and a back-end ratio of no more than 36%.
Depending on the type of mortgage and other factors, however, these ratios can go higher. For that is important to check all the 5 tricks to get a great mortgage rate.
As a general rule, you’ll need a minimum down payment of 20% of the purchase price of your home in order to get the best mortgage rates. Since mortgages are price adjusted based on risk factors, a loan with 5% down is considered higher risk than one with 20% down, and will carry a higher interest rate.
But that isn’t the only reason to save up 20%. When your down payment is less than 20% of the purchase price, you will likely have to pay PMI, or private mortgage insurance.
On a conventional loan with a 5% down payment, mortgage insurance will effectively add .62% to your payment (assuming a credit score of between 720 and 759). On a $200,000 mortgage, this will translate into an annual premium of $1,240, adding an additional $103.33 to your monthly house payment.
In the mortgage world, cash reserves are measured in terms of the number of months worth of house payments you have saved in cash. The reserve includes money saved in checking or savings accounts, money market funds, or certificates of deposit. However, it generally does not include funds in a retirement plan since that money can only be withdrawn after paying taxes and penalties.
The standard requirement for cash reserves on a mortgage is two months – as in you must have enough liquid cash after closing to cover your new mortgage payment (principal, interest, taxes, and insurance) for at least the next 60 days.
After you sign the purchase agreement and have secured your mortgage loan, ask your lender how long it usually takes to process the loan and see if they will lock in your rate. This sometimes comes with a fee, especially if longer than two months, but it might pay for itself if you think rates may rise.
We hope you like these 5 tricks to get a great mortgage rate. Please give us a comment if you like so.
If you need financial advising or you want to schedule a call, please contact us; we are ready to help you today.