One of the biggest financial undertaking in your life is buying a home. A dream home does not come cheap though and finding the best rates on a mortgage can make all the difference. Low rates translate to thousands or tens of thousands in savings over the terms of the loan. Below are some tips to help you qualify for lower rates on a mortgage.
Increase the Down Payment
Lenders set mortgage rates depending on the risk associated with a loan. A hefty down payment is an indication of lower risk of defaulting. A down payment 20% offers the best interest rates.
Down payments lower than 20% also attract a PMI or Private Mortgage Insurance. Conventionally, with a credit score of between 740 and 759 a 5% down payment will attract 0.37% PMI while 15% down payment will attract 0.15% PMI.
With that in mind, it’s better to delay your application and accumulate your savings first to hit the 20% mark. Another way would be piggybacking that is, taking out a smaller loan to pay off the down payment.
Reduce your Debt-to-Ratio (DTI)
DTI is a measure of how much of your income can be set aside to repay a loan. It comes in two types: Back end DTI is the ratio of all monthly debts divided by gross income, Front end DTI takes into account your housing costs/mortgage in relation to your gross income.
For better rates, front end DTI should at most be 28% while the Back end DTI should be 36% or below. A back end DTI of 43% is usually the highest that can be considered for a mortgage. However, some lenders can still give a mortgage to clients with DTI higher than 43% but at stringent rates.
Before you apply for a mortgage reduce your DTI by paying off your credit card debts, avoiding huge purchases that require financing and clearing other loans that reflect on your pay stubs.
Raise your Credit Score
An estimate from FICO shows that, with a credit score of between 620 and 639 you will get a mortgage at around 5.807% interest rate. On the other hand a score of 760 to 850 is the best tier with a much lower interest rate of 4.218%.
To raise your credit score start by first knowing where you stand. You can obtain it from credit bureaus or online. Comprehensive results show factors that can be improved for better scores. These include timely clearing of credit card debts, desirable credit mix and improving DTI as explained above.
Have Verifiable Income Stability
The ability to negotiate better mortgage rates pegs on your ability to repay the loan. This will be determined by consistency in your income for at least the past two years.
If your work history is riddled with long periods of unemployment, work towards having a stable job with verifiable income first. Any inconsistencies caused by factors such as ailment should be explained with confirmable medical bills.
Not everyone gets to be employed; if you are a freelancer/ self-employed put your finances in order. Ensure your income is consistent and well documented. Have the last two years’ duly filed income tax forms ready for scrutiny.
Go for a Short Term Loan
The interest payable to a mortgage varies with the repayment period. A short term mortgage has lower interest compared to a long term one of the same principal amount. However it requires higher monthly payments.
If your pay is high enough to sustain higher payments then you should go for a shorter term loan. That said, calculate the amounts that you stand to save for different loan terms to arrive at a repayment period that is worth the decrease in your take-home pay.
Although lenders are regulated by the government that does not mean their products are standardized: It’s a competition! Credit unions often offer lower rates compared to banks. They are also more likely to accept clients with low credit scores.
With a few clicks you can compare rates on different banks from their websites. There are also websites that offer rates comparisons on national banks, direct lenders and credit unions.
Some banks have discounts for long-term members, so it’s a good idea to visit your banker first and hear what he/she has to offer. Don’t shy off from using loan quotes from different lenders as a bargaining chip for lower mortgage terms.
Having the right information at your fingertips will be crucial when aiming for low rates on a mortgage. Information is power and that’s what the above tips give you; power to navigate the mortgage market and position yourself for the best rates.