How to get the best mortgage rate
Key takeaways
- You can work to improve your credit score, reduce your debt, and save up a sizeable down payment to help you get the best mortgage rate.
- Throughout the loan, obtaining the best mortgage rate can help you save money on interest.
- Compare quotes from at least three lenders to find the best mortgage rate.
Thankfully, even in this high-rate environment, there are ways to position yourself to receive the best possible mortgage rate. Here's how to compare mortgage rates before buying a house.
8 steps to get the best mortgage rates
It's a good idea to position yourself to succeed on the loan application and obtain the best mortgage rate as you weigh your options. According to Josh Moffitt, president of Silverton Mortgage in Atlanta, "There are three pillars: your credit score, your income (which is converted to a debt-to-income ratio), and your assets."
Are you prepared to discover how to obtain the best mortgage interest rate? Take heed of these eight steps.
1. Improve your credit score
Raising your credit score is a great place to start if you're wondering how to get a lower mortgage interest rate. Although it will only sometimes prevent you from getting a loan, a lower credit score can mean the difference between receiving the best rate and paying more for your borrowing arrangements.
The National Association of Mortgage Brokers (NAMB) president, Valerie Saunders, states that a credit score is crucial in assessing risk. "A lender will evaluate a borrower's ability to repay a debt using the borrower's score as a guide. The likelihood that the borrower won't default increases with the score.
Typically, it would help if you scored 620 or higher to qualify for a conventional mortgage. Nonetheless, those with the highest credit scores—usually 740 or higher—are eligible for the best mortgage rates. Generally speaking, the lender will offer a lower interest rate the more confident they are in your ability to repay on time.
Pay your bills on time and reduce or pay off your credit card debt to raise your credit score. Make sure your balance is at most 20% to 30% of your credit limit if you must carry a balance. Additionally, make sure to frequently review your credit report and score and search for any errors. Make any necessary corrections before applying for a mortgage.
2. Build a steady employment record
If you show that you have had consistent work and income for at least two years, especially from the same employer, that will make you more appealing to lenders. Prepare to present W-2s from the previous two years and pay stubs from at least the thirty days before your mortgage application. It will also be necessary for you to produce documentation if you receive commissions or bonuses.
Qualifying may be more challenging but still possible if you work for yourself or take multiple part-time jobs. If you work for yourself in completing your mortgage application, you must also provide business records, such as P&L statements and tax returns.
And what if you're a recent graduate embarking on your first job or returning to the workforce after a hiatus? If you have a formal job offer, lenders can confirm your employment as long as the offer includes your income. The same holds if you have a new job lined up but are currently employed. If you're making a significant change in your industry, keep in mind that lenders may flag your application if you're doing so.
Your work history gaps won't automatically disqualify you, but the duration of the gaps does. You may be able to justify the gap to your lender if, for example, your illness briefly caused you to lose your job. It can be challenging to get approved if you've been unemployed for six months or longer.
3. Save up for a down payment
If you have enough cash to cover a 20% down payment, a larger down payment can help you get a lower mortgage rate. Although lenders accept smaller down payments, you will typically be required to pay private mortgage insurance (PMI) if your down payment is less than 20%. On average, PMI expenses range from 0.46% to 1.50% of the initial loan amount per year. Mortgage insurance can be removed sooner, which will lower your monthly payment if your mortgage is paid down to less than 80% of the total value of your house.
There are particular loans, grants, and programs to assist first-time homebuyers who need help with a 20% down payment to buy a property. Program-specific eligibility requirements vary but frequently centre on factors like income and whether you're a first-time home buyer.
4. Understand your debt-to-income ratio
The amount of money you owe about your income is measured by your debt-to-income (DTI) ratio. It specifically contrasts your gross monthly income with the total debt payments you make each month.
Lenders tend to find you more desirable if your DTI ratio is lower. If your DTI is down, you must stay within your budget to make a new loan payment. The more income you allocate to your obligations, the higher your DTI, making it more challenging to afford additional debt.
As a general rule of thumb, lenders often avoid mortgages that require payments more significant than 28% of their gross monthly income. Your total DTI ought to stay below 36%.
Accordingly, if your monthly income is $5,000, you should aim for a maximum mortgage payment of $1,400 ($5,000 x 0.28), and you should make sure that the total of your mortgage and other debt payments does not exceed $1,800 ($5,000 x 0.36).
The maximum debt-to-income ratio for conventional loans is 45%; for FHA loans, it is 43%. There might be some exceptions if you meet certain conditions, like having a sizable savings.
The avalanche and snowball methods are two strategies that can help you pay off debt more quickly if you're having trouble getting out of it.
5. Check out different mortgage loan types and terms
Consider a 15-year fixed-rate mortgage rather than the conventional 30-year one if you believe you have found your long-term residence and have strong cash flow. Since 15-year mortgage interest rates are lower than other mortgage options, you'll pay less interest while paying off your house faster with higher monthly payments. If you are refinancing your current mortgage, you can choose a 15-year term.
Alternatively, consider an adjustable-rate mortgage (ARM) while rates are high. With these loans, your initial fixed rate will usually be lower than what you would get with a fixed-rate mortgage for the first phase of the loan (usually five or seven years). The loan then transitions to an adjustable rate for the balance of the term, which means your rate could fluctuate. You can refinance an ARM loan into a fixed-rate mortgage at that point or whenever rates decline.
Lastly, you can check your eligibility for loans that are guaranteed or insured by the government, like:
- Federal Housing Administration-insured FHA loans are well-liked by first-time homebuyers because they have lower minimum credit scores and down payment requirements than conventional loans.
- VA loans: A VA loan, which the US Department of Veterans Affairs backs, is an option if you or your spouse has served in the armed forces. There isn't a down payment needed for this loan.
- USDA loans: The USDA loan program, which the US Department of Agriculture guarantees, is intended to assist low- and moderate-income residents of rural areas in purchasing a house. There is no down payment required, but your home must be in a qualified area, and your income (which varies depending on where you live and how big your household is) can be a maximum of a certain amount.
6. Consider paying mortgage points
With mortgage points, you can purchase your way to a lower interest rate if you're ready to pay a fee. An interest rate reduction of 0.25% is usually achieved by paying 1% of your mortgage amount as points. Mortgage points are comparable to pre-paid interest.
For example, you have a $400,000 home loan with an interest rate of 7%. You can purchase a mortgage point for $4,000 to reduce your rate to 6.75% if you prefer a lower rate.
Nevertheless, not everyone should purchase mortgage points. If you want to sell within a few years, there are better options than this because it takes five years or longer to recover the upfront costs.
7. Compare offers from multiple mortgage lenders
Make sure you're getting the best deal for your circumstances when searching for the best mortgage rate, even if you're refinancing. According to a recent Freddie Mac study, it pays to shop around and don't accept the first rate you are quoted. Choosing a 6% interest rate over a 6.5%, for example, on a $300,000, 30-year mortgage, could save you almost $1,200 annually and nearly $6,000 over five years.
Check with your bank or credit union, but remember to do online research and in-person interviews with several mortgage lenders. When you obtain multiple quotes, you will discover that these lenders' offers have different fees, closing costs, private mortgage insurance premiums, and more, even though the interest rates are similar. You can choose the offer with the best terms by shopping for comparison.
According to Saunders, "shop and compare based on the loan estimates received." "Normally, you would only buy an automobile if you took it for a test drive. Give your loan a test drive before making the purchase.
8. Lock in your mortgage rate
Rates may change for a few weeks while the closing process is underway. Ask your lender to lock in your rate once you've obtained your loan and signed the home purchase agreement. Although there may be a cost associated with the service, it frequently pays for itself, particularly in the current unstable and expensive market.
If the mortgage rate were lower, how much money could you save?
You know how to compare mortgage rates, but how much could you save? See how much money can be saved on a $350,000 house loan with a 30-year fixed mortgage by looking at the chart below.
As you can see, a slight rate reduction could put thousands of dollars in your pocket. You'll cover and be in an excellent position over your mortgage to get the best deal and save as much money as possible if you follow the above instructions.
Other factors that affect your mortgage rate
Several variables, such as inflation and the state of the economy, influence how often mortgage rates fluctuate. If you're considering purchasing a home soon, it can be beneficial to monitor mortgage rates even though it's best to avoid trying to time the market.
Would you like more advice on how to shop for mortgage rates and be informed about rate updates? Get updated with weekly analysis and daily mortgage news stories from Bankrate.
Next steps to close on your mortgage
It's time to select the best loan offer and rate and apply for the loan now that you know how to get the best mortgage rate. An outline of what to anticipate throughout this procedure is provided below:
- Obtain your loan estimate: You will receive a loan estimate outlining the specifics of the mortgage three days after applying. This includes a list of closing costs, but remember that these are only preliminary figures. You can ask your lender for more information if you have any questions about what's included in your loan estimate.
- Take up underwriting: The underwriting division of your lender will assess your application and decide whether to approve your mortgage. Be ready to respond to inquiries and provide additional documentation as needed during this time. Maintain your financial and employment circumstances as well. Avoid applying for new credit cards or loans, making big purchases, and changing jobs.
- Await approval: If your mortgage is accepted, you'll be headed to closing. It's critical to ascertain the factors that led to the denial of your mortgage application. In general, you can apply for a mortgage again as soon as you'd like with a different lender, but it might be wiser to hold off to avoid damaging your credit for a few months.
A closing disclosure containing the finalized loan terms, including your interest rate and closing costs, will be sent to you as your closing date approaches. Verify that the rate in this document corresponds to the amounts for which you were first given a quote. Remember that rate locks typically only last for a certain period, so it's best to coordinate with your lender to prevent delays leading up to closing.
0 Comments