Securing the best mortgage rate doesn’t require perfect credit. Of course, a great credit score helps, but it’s not the only factor. Lenders look at a variety of factors. Think of it like a big puzzle. They put the pieces together and determine your risk level. Good qualifying factors can offset the not-so-good factors. Beyond your personal factors, though, you need knowledge of the process. Going into the mortgage process informed can help you secure the rate you desire.
Lower Your Risk
The first step is likely the hardest. You must lower your risk. It requires a combination of factors. You may have some, but not others. The more favorable you make yourself look, the lower the interest rate lenders may offer.
- Improve Your Credit
Like we said above, you don’t need perfect credit. You should have decent credit, though. Before you apply for a mortgage, look at your credit report. Equifax, Trans Union, and Experian each offer a free report each year. Take advantage of it and look at your credit history. Look for:
- Late payments
- Large balances
If you have any of the above, correct them. Bring your payments current, pay balances down, and pay off collections. This will help your credit score improve over a few month period. The higher your credit score, the better your interest rate.
- Save Money
Many mortgage programs offer low down payment options. USDA and VA loans even offer no down payment options. But, the more you put down, the lower your risk. This is called your loan-to-value ratio. The lower the ratio, the less risk a bank takes. This may mean a lower interest rate. You don’t need the standard 20% down payment, per se, but it can help lower your rate. A large amount of savings shows you are financially responsible. This is something lenders look for in a borrower. Even if you don’t use the money for the down payment, lenders can count your savings as reserves. It shows lenders you can pay your bills even if your income suddenly stopped.
- Stabilize Your Employment
A 2-year employment history shows stability. This doesn’t mean you are stuck with a job you hate. It does mean sticking within your current industry if possible. Lenders look at 2 things when determining your employment stability. They look at income patterns and employment patterns.
If you change jobs, lenders prefer you stay within the same industry. But, if you can prove you had specific training or education in the new industry, they may grant an exception. Your income, however, should have a steady increasing pattern. If you change jobs, make sure you make as much if not more as your previous job. Lenders consider a pattern of decreasing income as risky. This may mean a higher mortgage rate.
- Pay Down Your Debts
Your debt-to-income ratio is another big factor in your mortgage rate. The higher the ratio, the more risk you pose. Each mortgage program has its own risk level, but lenders set the rates. For example, FHA loans allow DTIs of 31/43. Certain FHA lenders, though, may reward borrowers with ratios lower than 31/43. It shows financial responsibility and a lower risk. As a bonus, the lower your utilization rate, the more your credit score increases. Your utilization rate is the amount of outstanding credit card debt versus your available credit. Aim for no more than 20% of your available credit in outstanding debt for the best results.
Shopping for the Mortgage Rate
Once you perfect your risk level, you can shop for a loan. We recommend checking with several lenders. This way you know what rates you can secure. Each lender may have different rates based on the risks they can accept.
- Determine the Loan Program you Want
There are many loan programs available. Comparing 2 different programs won’t provide you with the right answer. Determine if you want a fixed rate or adjustable rate loan. Then determine if you qualify for a conventional or government-backed loan, such as the FHA loan. This way you can apply for similar loans with each lender.
- Apply with Several Lenders
Once you determine your loan program, start applying for a mortgage. You can apply online or in person. Your local bank isn’t the only option. Consider mortgage brokers, credit unions, and online banks as well. This way you get a good idea of the available programs and mortgage rates. Make sure you apply for the same program with each lender. This allows proper comparison of the programs.
- Read the Loan Estimate.
The Loan Estimate is a document every lender must send within 3-business days. It shows you the cost of the loan, not just the interest rate. These costs play a role in the affordability of the loan. The Loan Estimate shows the interest rate, APR, and detailed closing costs. Compare these side-by-side for comparison’s sake.
Look closely for “origination fees” and “discount points”. These fees often directly affect your mortgage rate. For example, one lender may offer a 4% interest rate with 0 points. Another may offer a 4% interest rate with 1 point. The rates are the same, but the lender requiring the payment of 1 point is more expensive. 1 point on a $200,000 loan equals $2,000.
- Watch the lock period.
The lock period is also important. The longer you lock a rate, the more it costs you; in other words, the higher the rate. Make sure you ask each lender the length of the lock period. If it expires, you either take the current rate or pay for a lock extension.
For example, a lender offering a 4% rate for 30-days may be a better option than one offering a 4% rate for 15-days. Of course, if your loan is ready for closing, the 15-day period may be acceptable for you.
Shopping for the lowest mortgage rate takes some work, but it’s worth it. Before you apply for a loan, beef up your personal profile. Decrease your risk level as much as possible. Think about making your payments on time and saving money. Also consider minimizing your outstanding debts. Each of these factors helps lower your interest rate. Once you are ready, shop for a lender amongst the many available options. With these steps, you can ensure you secure the lowest rate for you.