For many homebuyers, the interest rate is one of the most important factors they look at when house hunting. What most buyers do not understand, however, is that mortgage rates are determined by many factors. Market conditions obviously play a major role, but there are some qualifying factors within the buyer’s control that can help secure a lower rate. Here are six smart strategies for you to consider!
Increase Your Credit Score
The higher your credit score, the less risk you appear to have when applying for a mortgage with a lender. Paying your bills on time and not overextending your credit leads lenders give you a better rate that is closer to the advertised rates because they do not have to adjust for a low credit score. While developing a strong credit score can take time, it’s never too early to start building a healthy credit score!
Maintaining Employment Status
Mortgage lenders understand that not everyone has a consistent, linear employment history from the time they enter the workforce. But they also know that steady employment is a good indicator that a borrower will repay their mortgage. Generally, lenders prefer to see at least two years of steady employment history.
Improve Your Debt-to-Income Ratio
Your debt-to-income ratio is determined by dividing your total monthly debts by your household’s gross income, which is income before taxes. Multiply this number by 100, and you will get your DTI percentage. Lenders typically require a DTI of 43% or lower to qualify for most mortgages. However, a reduced DTI (by paying off debt or increasing income) could increase a buyer’s chances in obtaining a lower rate.
Leverage a Higher Down Payment
The size of your down payment has a direct impact on the interest rate your mortgage lender will set for your loan. The larger the down payment you offer your lender, the lower your interest rate may be. So while you may be able to finance a home purchase with a down payment as low as 10%, 3% or even 0%, consider putting more money down to lower your rate.
Consider a Shorter Loan Term
In general, the longer your loan term, the more interest you will pay. Loans with shorter terms usually have lower interest costs but higher monthly payments than loans with longer terms. If you can afford to pay more each month, it may be worth the interest savings from a lower rate. Your loan officer can help you do the math to determine if a shorter loan term fits your budget!
Refinance Your Mortgage Later
The good news is that homebuyers can also refinance their home loan down the road to lower their rate.* Done properly, a refinance can have both immediate and lasting benefits. Consult your loan officer to determine if and when a refinance can benefit you!
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*Refinancing may result in increased total life of loan finance charges over your current obligation.
