Mortgage rate have been volatile this year due to COVID-19. Although mortgage rates rose today for the first time in 3 weeks, they still are considered low.
- The 30-year fixed-rate mortgage averaged 3.13% APR, an increase of nine basis points over the previous week’s record low.
- The 15-year fixed-rate mortgage averaged 2.68% APR, five basis points higher than the previous week’s average.
- The 5/1 adjustable-rate mortgage averaged 2.99% APR, 12 basis points higher than the previous week’s average.
With 30 year still hovering around 3%, this is an excellent time for people to buy a new home – but the trick is ensuring you can lock in one of these low rates. Here are the 5 major factors that influence your rate, and what you can do to improve each one.
Keep in mind that while each factor is important, lenders will look at your full financial picture. So while one of these may be a trouble spot for you, if you are strong on the others you may still be able to qualify for a low rate.
1 – Your Credit Score: This is probably the most important factor when securing a low mortgage rate. Make sure your score is as high as possible before getting quotes. Many lenders use the FICO model for credit scores with a 300 to 850 point range, with a higher score indicating less risk to the lender.
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or lower: Poor
How to improve: While the best mortgage rates are usually available only for those in the very good and above range, if you’re in a lower category there are ways you can increase your score. First, you need to understand how to scores are calculated. Through the three reporting credit agencies (Experian, TransUnion and Equifax) FICO credit scores are calculated as follows:
- 35% is based on your payment history, so always make sure you make payments on time.
- 30% is based on your credit utilization, which is the total amount of credit you are using. If you have $10,ooo available credit on a credit card and are using $4,000, you have a 40% utilization rate. To get your credit score up, try to keep it under 20%.
- 15% is based on length of credit history. Avoid closing accounts you’ve had for a long time that are in good standing. This will also help with your utilization rate.
- 10% is based on new credit accounts. If you are looking to get a new loan, only open new accounts if necessary.
- 10% is based on credit mix. Lenders want to see a mix of different types of loans, such as installment loans and revolving credit.
Be sure to check your credit report regularly for errors. If you do find errors in your report you can file a dispute with the three major credit bureaus.
2 – Employment History: Lenders want to make sure you have stable employment and income. If you’ve worked at the same place for a long time, and can show consistent income growth, you’re more likely to get a low rate because lenders feel confident you’ll have the income to make payments. The opposite is also true – if you’ve changed jobs recently, or multiple times in the past few years, you will have a harder time locking in a low rate.
How to improve: If this is a trouble area, look around for lenders who are more lenient on employment history. Traditional banks may review your past two years of employment. Additionally, if you just started a new job – this may not be an ideal time to take out a mortgage loan. You may want to consider waiting to be sure this employment will be long term.
3 – Down Payment: The more money you can put down upfront, the less risk you are to a lender. Not only does it mean a lower loan amount, but also a lower loan-to-value ratio. A low LTV ratio means less risk.
How to improve: Instead of just putting down the minimum requirement, put down a 20% down payment.
4 – Debt-to-Income Ratio: Your debt-to-income (DTI) ratio is all of your monthly debt payments divided by your gross monthly income. This is used by lenders to determine your ability to manage the monthly payments to repay the money you plan to borrow. The higher the ratio, the more trouble you’re likely to have making your mortgage payments. The highest DTI most lenders will accept is 43%, but most want to see less than 36%. A lower DTI will increase your chances of being accepted by a top mortgage lender, and getting a good rate.
How to improve: If your DTI is high, there are two ways to lower it. The first is to pay off some of your debt. Debt included in your DTI ratio are things like credit cards, car payments and child support.
- Example: If you make $10,000 / month, and your total monthly debt is $4000, your DTI is 40%. This is in the acceptable range for most lenders, but you may not get a top rate. If you can reduce your credit card balance, thus reducing your new monthly payment to $3000/month, then your DTI becomes 30% and you will qualify with better lenders.
The second way to lower your DTI is to increase your income. This is trickier, because lenders like to see history and consistency with income, but if you are planning to buy a home next year, start looking for ways to increase your income now through consulting, contracting or additional PT work.
- Example: Same as above; you make $10,000 / month, your total monthly debt is $4000 and your DTI is 40%. If you can raise your income to $12,000 / month, your DTI drops to 33% – again putting you in a better range.
5 – Pay for Points: Yes, you can actually ‘buy’ a better mortgage rate by paying for points. A “point” is an upfront fee you can pay to lower the interest rate on your mortgage. Typically each point is equal to 1% of the total mortgage amount. On a $200,000 mortgage, for example, each point would cost $2,000 upfront. Each point lowers the interest rate of your mortgage around one-eighth to one-quarter of a percent.
One of the most important tips for new buyers is to shop around! Not all mortgage lenders are created equally. Some specialize in buyers who can’t afford a high down payment, while others are more relaxed on the debt-to-income ratio. There are lenders who specialize in military family loans and those specific for low income families.
Do your research, identify three prospects and get a quote from each one before locking anything down.
Once you are ready and pre-approved, you can reach out to a trusted agent to get you started on a home search.