The mortgage industry determines not only if you qualify for a mortgage, but also what interest you’ll pay. By knowing what factors play a role in the mortgaging process, you can learn what actions you can take to get the best rate, whether you’re looking to purchase or refinance a home.
Improve credit score
A vital element when determining if you qualify for a loan will be your FICO credit score. The higher the credit score, the likelier you will earn a good mortgage rate. A higher credit score will also allow for a lesser down payment. According to myFico.com, a credit score above 760 can result in an interest rate as low as 3.52 percent.
To improve your credit score, first review where you stand; you can receive a free credit report online at creditkarma.com. Ensure that there are no errors in your credit history that might be lowering your credit score, and dispute any negative account information, such as late payments. Finally, pay down, or pay off, any existing loans.
Reduce debt
Lenders and banks focus on the debt-to-income ratio (DTI). A lower DTI ratio may result in a lower interest rate. There are two forms of DTI: the back-end ratio and the front-end ratio.
The back-end ratio measures your total monthly debt expenses (present mortgage payments, credit card payments, child support, other loans, etc.) divided by your gross monthly income.
The front-end ratio considers no debt expenses other than the mortgage payment. Therefore, it is calculated by dividing your mortgage by your monthly income.
Generally, a DTI ratio should remain below 36 percent, although there is some flexibility. For an FHA loan, the maximum back-end DTI ratio is 43 percent.
Comparison shop
Research several lenders before making a choice. Compare each lender’s interest rates, the length requirements of the contract, closing costs (if applicable), and the difference between its fixed and adjustable mortgages.
An easy way to begin your search is bankrate.com. Its Compare Mortgages page will generate a list of lenders with the most attractive rates based on the type of loan you need.
Fixed or Adjustable mortgage
A mortgage contract can either be fixed, or adjustable. With a fixed-rate mortgage, the interest rate is set when the loan is taken out and will not change. An adjustable-rate mortgage can go up or down. Weigh the advantages and disadvantages of fixed-rate versus adjustable rate here.
Higher down payment
Lenders view a higher down payment as less risk. And because mortgages are dependent upon risk factors, a down payment of 20 percent of the purchase price of your home relates to lenders as a lower interest rate. Whereas, a down payment of only five percent will carry a higher risk, and therefore a higher interest rate.
Take steps to improve your credit, pay down debt, and start saving. Educate yourself on the types of loans, contracts, and mortgages available to you. Once you understand the factors associated with obtaining a mortgage, you can take actions to position yourself for the best rate.
Let Empire Inspections and Appraisals assist you with your home-buying process. Call (845) 774-8207 or schedule an appointment online.
