How to Get a Great Mortgage Loan
What qualifies you for the best interest rate? This is a multilayered question that doesn’t have just one simple answer.
Qualifying for the best mortgage loan isn’t just a matter of comparison shopping. Qualifying for the best mortgage loan is about planning ahead and having the right lender on your team to help you find the best possible option for your unique financial situation. When determining what mortgage loan you’ll qualify for, we as lenders, have to look at your whole financial picture. Having this picture laid out in front of you before you even begin your house hunt can help identify weak areas to be corrected and possibly save thousands of dollars in interest payments.
Here are the FIVE KEY AREAS that determine what kind of interest rates borrowers can qualify for and some ways you can help improve your ranking in each category.
1. Credit Scores
Mortgage loans are adjusted based on a number of criteria. One of the main criteria is the FICO credit score, which shows us your payment history for any credit cards or loans. We look at this number in order to determine how reliable you will be in paying back your loan. The general rule of thumb, with all other factors being equal, is: the higher the credit score, the lower the interest rate.
HOW TO PREPARE
Get a credit report and look it over. See any errors? Make sure you dispute any mistakes before you apply for a home loan. Do you have any outstanding debts? If so, paying them down can help improve your score. Learn more about credit scores from the Consumer Financial Protection Bureau.
2. Employment & Income Stability
Ideally, you’ll be able to show us that you have been employed consistently for the past two years. This can help you qualify for a better mortgage loan, as it shows that you’re able to continuously earn income. Long periods of unemployment don’t look great on your mortgage application, nor will a decline in earnings.
HOW TO PREPARE
Be ready to provide proof of employment. This will include income tax returns, bank account statements, proof of employment, and more. Even if your job history has been spotty in the past couple of years won’t mean you won’t be able to qualify for a home loan. This isn’t the only factor in determining the interest rate you’ll pay. If you have questions about how your job history may impact your potential interest rate, contact us today. We can help you get a better idea of what your home loan will entail by looking at your full financial history.
3. Debt-to-Income Ratio
Debt-to-income ratio (DTI) is comprised of your monthly debt payments divided by your gross monthly income. Mortgage lenders typically want to see a front-end ratio of no more than 28% and back-end ratio of no more than 36%.
The front-end ratio, or housing ratio, shows what percentage of your income will go toward housing expenses. The back-end ratio shows what portion of income is needed to cover other monthly debts (credit card bills, car loans, student loans, etc.) plus mortgage payments.
HOW TO PREPARE This number can play a big role in your potential mortgage loan. There are many online tools to help you calculate your debt-to-income ratio and knowing this ahead of time is just as important as knowing your credit score.
4. Down Payment
Mortgage loans are adjusted based on risk factors. If you only pay 3.5% down, the risk that the loan won’t get paid back is higher than if you put 20% down. The thought behind this is that if you pay more up front, you immediately have more stake or ownership in the property.
Generally, a higher down payment will mean a lower interest rate. The magic down payment percentage you should be saving up for is 20%. If your down payment is less than 20%, you’ll likely be required to pay private mortgage insurance (PMI).
HOW TO PREPARE
Saving up for a down payment is a great idea. Armed with a sound financial plan, saving up for a down payment over several years may be the best way for you to prepare for homeownership.
However, if a 20% down payment sounds out of the question, you still have options. Whether it’s a second mortgage, PMI, or special zero-down mortgage programs*, we can look into different ways of getting you into your dream home.
5. Cash Reserves
A cash reserve is the number of months worth of house payments you have saved up in your checking or savings accounts, money market funds, etc. The standard requirement for a home loan is two months of cash reserves. You must have enough moveable cash after you close on your home purchase to cover your monthly mortgage payment. Proving you have enough or more than the standard amount of cash reserves helps to show you’ll pay the loan back and will consequently impact your mortgage loan.
HOW TO PREPARE
Plan to set aside enough money, after all other fees and costs have been applied, for the next several months. Higher risk mortgages may have higher cash reserve requirements and can adversely affect mortgage loans.
While mortgage calculators and online comparison tools can be helpful, working with one of our experienced mortgage bankers is the most effective way to lay out all of your options. Give me a call today to help you take your first step towards homeownership.