With interest rates at staggeringly high levels (and no sign of falling significantly anytime soon), it seems impossible to get a decent mortgage; you might be wondering if it’s possible to finance a home purchase.
Do not despair. A volatile interest rate environment certainly complicates the equation, but buying a home isn’t just about economic trends. It’s important to buy a home and get a loan that’s right for your financial and living situation. Fortunately, even in this high-yield environment, there are ways to net yourself the best mortgage rates.
Your mortgage rate affects your monthly payments and how much you pay over the life of the loan, so even small differences can add up. For example, if you choose a 6.5% interest rate instead of a 6.75% 30-year loan, you can save $7,500 for every $100,000 you borrow.
The interest rate on your loan depends on many factors, including your down payment, your credit rating, the estimated value of the home you’re buying, and the term of your loan. We’ll show you how to find the best mortgage rate for your home purchase.
Steps to Getting the Best Mortgage Rate
When considering your next mortgage options, it’s best to be well prepared to complete your loan application and get the lowest interest rate. “There are three pillars: your creditworthiness, your income (which translates into a debt-to-income ratio) and your wealth,” explains Josh Moffitt, president of Silverton Mortgage in Atlanta.
Check your credit score and reports
Any effort to ensure the highest interest rate on your mortgage should start with checking your credit history and reports with the big three credit bureaus, Equifax, Experian, and TransUnion. Here’s an example of how to do this and what to look out for.
At Experian.com, you can sign up for a free account that will give you a FICO 8 Score and get a complete picture of where your creditworthiness needs improvement.
For $4.95, you can get a FICO Score 2, which Experian says is the credit score most mortgage companies use.
Experian also offers a tool called Experian Boost, which can easily boost your credit score by combining your utility and cell phone bill payment history.
Check your credit report and look for any inaccuracies that are dragging down your score. If you find anything wrong, you can file a dispute online, by phone or email.
AnnualCreditReport.com allows you to get free copies of your reports (but not your results) from all three credit reporting agencies. You can receive up to one free report per week until April 2021.
Learn more about how your credit score affects your mortgage rate and whether it makes sense to pay for a special version of your credit score.
Build a solid employment record
You are more attractive to lenders if you have a steady job and income for at least two years, especially with the same employer. Be prepared to provide pay stubs from at least 30 days prior to applying for a mortgage and W-2s from the past two years. If you earn bonuses or commissions, you must also prove it.
It may be harder to qualify if you’re self-employed or your salary comes from multiple part-time jobs, but it’s not impossible. If you are self-employed, in addition to your tax return, you may need to provide business documents such as income statements to complete your application.
What if you are a graduate just starting your career or returning to the job market after a hiatus? Lenders can usually verify your employment when you have a formal job offer in hand, as long as the offer reflects what you will pay. The same applies if you are currently employed but will soon have a new job. However, if you’re entering an entirely new industry, lenders may flag your application. So keep this in mind when making major changes.
Gaps in work history don’t necessarily disqualify you, but the length of those gaps matters. For example, if you were out of work due to illness for a relatively short period of time, you can easily explain the gap to your lender. However, if you have been unemployed for an extended period (six months or more), it may be difficult to obtain permission.
Save more deposits
If you put a small down payment on a home, lenders will view you as a riskier borrower than someone who puts a larger down payment.
One place lenders consider this risk is in personal mortgage insurance (PMI). If you can afford a traditional loan with less than 20%, you usually have to pay the PMI premium. Until you have enough funds to call it a day, PMI affects you in the same way higher interest rates do: by increasing your monthly payments and overall borrowing costs.
Saving money for a larger down payment can help you avoid PMI altogether. Even if you can’t put down a 20% deposit, you can pay less PMI with more deposits. Plus, a larger down payment can actually result in a lower interest rate.
The more of your own money you are willing to invest in a property, the less risk you have for the lender, who may offer you a lower interest rate.
Having trouble saving? Check out the prepayment resources to see if you qualify for a prepayment assistance program in your area.
Know your debt-to-income ratio
Your debt-to-income ratio (DTI) compares how much you owe to how much you earn. Specifically, it compares your total monthly debt payment to your total monthly income. How do you find out your DTI ratio? Bankrate has a calculator.
Generally speaking, the lower your DTI ratio, the more attractive you are to lenders. A low DTI means you can probably afford new loan payments without it
Consider other mortgage loan types and terms
If you think you’ve found a long-term home and have good cash flow, consider a 15-year fixed-rate mortgage instead of a traditional 30-year fixed-rate mortgage. You’ll pay more each month, but pay off your house sooner — and you’ll pay less in interest because the interest rate on a 15-year mortgage is lower than other mortgage options. You can also choose a 15-year term when refinancing your current mortgage.
Or, although interest rates are high, consider an Adjusted Rate Mortgage (ARM). With this type of loan, you start with a fixed rate for the first period of the loan (usually five or seven years), which is usually lower than a fixed-rate mortgage. After that time, you will switch to an adjustable plan (i.e., your plan may go up or down) for the remainder of the semester. You can refinance your ARM loan into a fixed-rate mortgage whenever interest rates drop.
Stretch your budget. The higher your DTI, the more income you have to spend on loan repayments, making it harder to take on more debt.
A popular rule of thumb for lenders is to avoid mortgage payments that require more than 28% of your gross monthly income. Your overall DTI should stay below 36%.
So if you make $5,000 a month, you want your mortgage payments to be no more than $1,400 ($5,000 x 0.28), and you want to make sure your mortgage payments plus other debt payments are under $1,800 ($5,000 x 0.36).
The maximum DTI is 45% for conventional loans and 43% for FHA loans. However, if you meet certain requirements such as B. Great savings.
If you’re struggling to get out of debt, there are several ways to help you pay it off faster, including the avalanche method and the snowball method.
Finally, you can check to see if you qualify for government-sponsored loans such as:
- FHA Loans: FHA loans are insured by the Federal Housing Administration and are popular with first-time home buyers because the minimum credit rating and down payment requirements are not as high as traditional loans.
- VA Loans: If you or your spouse are serving in the military, you may consider a VA loan issued by the United States. The Department of Veterans Affairs has it covered. In most cases, no down payment is required, but if you have a low credit rating, your lender may require you to pay a down payment.
- USDA Loans: The USDA Loan Program was created by the USDA to help low- and moderate-income people in rural areas purchase their own homes. Again, no deposit is required, but your home must be in an eligible area and your income must not exceed a certain amount (based on your location and household size).
Compare quotes from multiple mortgage lenders
When looking for the best mortgage rate, including refinancing, do the necessary research to make sure you find the best mortgage rate for your situation. Don’t take the first price offered – it’s worth a try. According to one study, borrowers saved an average of $1,435 by receiving just one additional interest rate offer, and nearly $3,000 by receiving five interest rate offers.
Of course, check with your own bank or credit union, but beyond that, there are several lenders you can talk to in person and explore options online. As you get more quotes, you’ll find that even with comparable rates, these lenders’ quotes include different fees, closing costs, and personal mortgage insurance premiums (just to name a few that can really add up). By shopping around, you have more flexibility to choose the offer with the best terms.
“Buy and compare based on the credit estimates you get,” Saunders says. “You usually don’t buy a car without first driving it. Before you go ahead and buy it, take it for a test drive.”
Secure Your Mortgage Interest
Sometimes, the closing process takes several weeks, during which time prices can fluctuate. After you’ve signed your home purchase agreement and secured your loan, ask your lender to fix your interest rate. The service sometimes charges a fee, but usually pays for itself, especially in the current volatile high-yield environment.