One of the most confusing and stressful parts of buying a home is figuring out all the financial matters. At the top of the list are mortgage rates. The rate you receive can have a huge influence on how much a home ultimately costs each month and over the life of the loan.
The experts at Flagship Financial Group share insider advice on what borrowers need to have to score the best mortgage rates.
Great Credit Score
By far, the most important factor for mortgage rates is your credit score. Lenders use it as an indicator of how responsible you’ll be as a borrower. Your score is based on five things:
- · Payment history
- · Amounts owed
- · Length of credit history
- · How many types of credit are in use
- · Account inquiries
Payment history has the largest impact on your credit score. It accounts for 35% of your overall score with amounts owed taking another 30% of the pie. The takeaway – keep your debt amounts low and never miss a monthly payment.
Before you apply for a loan check your credit score. Look for any mistakes that could be hurting your score and easy ways to bump it up. By law, most discrepancies should be removed within seven years, including bankruptcies. If you find an error you’ll need to contact all three credit reporting agencies to get it cleared off your report.
Working in Civil Service and the Community
Being a veteran is a big advantage because you can possibly get a VA loan. Flagship Financial specializes in VA loans, and their lenders point out that one of the benefits of using a VA loan is getting extremely good interest rates. Even without a down payment or the highest credit score you can secure a competitive rate since the loans are guaranteed by the Department of Veteran Affairs.
There are also special housing programs for police officers, firefighters, EMT personnel, teachers and nurses. One example is the Good Neighbor Next Door Sales Program. Lenders also sometimes offer special rates and discounts for people working in these professions.
Income and Job Security
After looking at your credit score, a lender will then scrutinize your income and job history. These two factors play a role in how much money you have for house payments each month. Lenders like to see borrowers who have been steadily employed for at least two years. The longer you’ve worked in your current position/company the better.
If you are self-employed it may be a little more difficult to secure a loan in general because it’s harder to prove you have a steady, reliable income. The new Fannie Mae guidelines make it a little easier on those loans, but for others you’ll probably still need two consecutive years of tax returns to show how much income you earn.
Current Debt and Debt Ratio
A home loan is a form of debt just like a credit card or store card. Since debt payments need to be made every month, the lender is going to factor them in as a monthly expense that reduces how much you have to spend on housing.
Debt ratio refers to how much debt you have in relation to your credit line. For example, if you have a credit card with a maximum of $3,000 and you have a balance of $1,500 your debt ratio is 50%. You’ll want the ratio to be as low as possible before applying for a home loan.
Down Payment Amount
Today, unless you are eligible for a VA loan, you’ll probably need at least 3% of the purchase price for a down payment. However, the higher your down payment is the lower your interest rate will likely be. A down payment of 20% can result in very competitive interest rates and eliminate the mortgage insurance premiums.
The lender will ask for bank statements so they can verify that you do in fact have enough money saved for the down payment. Examining two or more months’ worth of statements also gives them a better understanding of your overall financial wellbeing.
If you’ve owned a home in the past, that can also help as long as you didn’t go into foreclosure. Each lender has their own guidelines, risk thresholds and specialties. It’s a good idea to research your options first then inquire about a loan pre-approval. This will give you a better idea of how much you qualify for and the terms you may receive before actually applying for a loan.