Interest rates are extremely high right now and show no signs of falling way back down anytime soon. Is it even possible for you to get a decent mortgage rate? Can you even buy a home at all?
While the interest rate market is volatile at the moment, you can still shop around for a home and a mortgage rate that fits your unique circumstances. There are ways for you to get a good mortgage rate despite the high rates going on right now.
There are many factors in play when it comes to the interest rate on your loan, from your credit score to your loan’s term. Let’s go through some tips for getting the best mortgage rate available.
Boost Your Credit Score
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First things first – get your credit score up as high as possible. If your credit score is low, it can saddle you with more expensive borrowing terms than what you would get if your credit score was higher.
Credit scores let lenders know how likely you are to follow through or default on a loan. The higher your credit score, the less likely you will default – at least, that’s how lenders view you. A score of 620 or higher can qualify you for a conventional mortgage loan, but a score of 740 or higher can snag you the best mortgage rate since you’re viewed as being able to pay on time, every time.
Have Proof of Steady Employment
Borrowers are more attractive to lenders if they have at least two years of continuous employment and income, especially if it comes from the same employer. You will need to prove your income within 30 days of applying, providing W2s from the last two years, pay stubs, and any earned bonuses or commission.
However, if you’re self-employed or are working several part-time jobs, you will need to show tax returns and business records. Those who’ve just graduated or are getting back into the workforce after a period away, you will need to show a formal job offer with the salary listed on it. The same goes for anyone who is currently employed but is switching to another employer.
Work history gaps won’t disqualify you outright, but the length of your gap and the cause for it can make a difference. If you’ve been unemployed for six months or longer, you might find it difficult to get approved at all.
Put Aside a Substantial Down Payment Amount
If you can put down at least 20 percent in liquid cash, you can get a decent mortgage rate. Lenders will accept lower down payments, but that typically means you’ll also have to pay private mortgage insurance, which will jack up your monthly payment.
First-time buyers who cannot cover a 20 percent down payment can apply for loans, programs, and grants designed to assist with buying a home. They might have low-down-payment options, but you’ll have to check each program for eligibility.
Know Your Debt-to-income (DTI) Ratio
How much monthly debt you have is rated against how much income you make per month. The lower your DTI ratio, the more lenders are likely to see you as being able to afford a loan payment every month. If your DTI is higher, lenders will see you as having more trouble affording the debt.
If a mortgage demands you pay more than 28 percent of your gross monthly income, steer clear of it. 45 percent is the max DTI for a conventional loan while, for FHA loans, it is 43 percent.
Look Into Loan Types and Terms Across Lenders
A fixed-rate mortgage can come in 15- or 30-year terms, with 30 being standard. The 15-month period is ideal for those who have a good income and plan on staying in their new home for many years. You’ll have higher monthly payments but get your home paid off sooner. If you’re refinancing a current mortgage, this is a good option.
Since the market is volatile right now and interest rates are high, an adjustable-rate mortgage (ARM) might be better. It starts with a fixed rate for the first five to seven years, then switches to an adjustable rate When rates go down, you can refinance your ARM loan into a fixed-rate mortgage.
Don’t go with the first lender you find. Cross-compare lenders in person and online, plus reach out to your credit union or bank to explore their options, too. Shopping around will ultimately give you more options.
You don’t need a perfect credit score and high annual income to qualify for home loans from District Lending. Even if you’re a first-time homebuyer, you can find a good mortgage rate if you know how to approach the process.