There is more to getting a great mortgage rate than just comparative shopping. It is also much more than having a good credit score. When you apply for a mortgage, there are many factors your lender will review to determine not only if you qualify for a mortgage, but what interest rate you will pay.
Mortgages are not taken lightly. There is a lot at stake when it comes to a mortgage loan, and your rate can change drastically based on the factors we will look at below. Even a slight difference in these factors could mean the difference of thousands of dollars in interest payments for you long-term.
To get the best mortgage rate possible, you will need to ensure that your mortgage application shows you are well-qualified.
These are the 6 major factors that mortgage lenders review, along with tips on how to improve your current application.
1. Credit Scores
One of the main things your mortgage lender will need to review is your credit score. Your credit score helps your lender determine whether or not you qualify for a loan and what rate you will pay on your mortgage. The higher your credit score, the lower your mortgage rate will be. On average, it is best to have a credit score of 750 or higher to qualify for lower mortgage rates. Typically, if your credit score is anywhere between 620- 680, you may not qualify for a mortgage loan (depending on the lender).
If your credit score is below the minimum requirements, or you want to improve your credit score, you will need to start monitoring it. You can do this by paying down or eliminating any outstanding loans and debts. Also, be sure to make your payments on time and clean up any errors on your credit report.
2. Employment and Income History
For an ideal candidate, mortgage lenders prefer to see a steady employment history of at least two years. Long periods of unemployment or unsteady work history can impact your mortgage application. If you have been working the same job for at least two years or have changed to a higher-paying position, it looks better on a mortgage application.
This is why it can be difficult for self-employed people to get approved for a mortgage. If you are self-employed and finding it difficult to get approved for a mortgage, check out one of my earlier articles here.
3. Debt-to-Income ratio
When a mortgage lender is reviewing your application, they will also look over your debt-to-income ratio or DTI ratio. Your DTI ratio is the difference between how much you owe in debt and how much income you make.
Lenders need to review your DTI to ensure you can not only afford the loans you have now but that you are able to take on a mortgage loan as well. If your DTI ratio is anywhere over 43%, you will not get approved for a mortgage. The lower your DTI is, the more likely you are to qualify for a lower interest rate.
4. Down Payment
As you are probably aware, a down payment is important to have when purchasing a house. Depending on the value of the property you are buying, you will need to come up with anywhere between a 5%-20% down payment. 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. The higher your down payment, the more likely you are to once again, qualify for a lower mortgage rate.
5. Cash Reserves
A cash reserve is measured in terms of the number of months worth of house payments you have saved in cash. This includes the funds you have saved in your checking and savings accounts or additional funds you may have. The standard requirement for cash reserves on a mortgage is two months. Meaning you need to have at least two months’ worth of mortgage payments saved in liquid cash. Depending on the type of mortgage you go with, you may be required to have more cash on hand.
6. Finding the Best Mortgage Rates
Once your application and your finances are in tip-top shape, it’s now time to start shopping for a mortgage. It’s best to shop around and compare mortgages with different lenders. Don’t just step into the first bank and accept that mortgage rate right away.
What you can do is visit a mortgage broker who can help you compare hundreds of different lenders to find you the best interest rate and mortgage options available for you. Work with me, Darren Robinson, today. I can help you get approved for the mortgage you need. Not only can I help you get approved, but I can also provide ways for you to improve your application so you can qualify for a lower mortgage rate.
Whatever your mortgage needs are, I’m here to help. To get started, begin your mortgage application here or give me a call at 705.315.0516. Your future home is just a phone call away!