Are you thinking about buying a home or refinancing the one you've got, but worried you won't qualify for a low mortgage rate?
Well, they say knowledge is power, so you may want to read about what the experts say you'll need to qualify for today's best rates.
And if you have any doubt that today's rates are low, consider that Mortgage News Daily, an organization that provides housing news and analysis, reports that as of September 25, 2012, "we've never seen rates move lower this quickly from all-time lows to 'even lower all-time lows.'"
That rate, they say, as of September 25, 2012, is 3.33 percent for a 30-year fixed rate mortgage, a 52-week low.
Of course, that rate is for those with qualities such as excellent credit, sufficient equity, job stability, and a few other things that impress lenders, as we'll explore below.
But if you fall short on any of these, don't give up. We've asked experts to weigh in with tips on how to correct any "issues" you might have.
Read on to see if you have what it takes to qualify for a historically low mortgage rate and save money for the next, oh, 30 years or so.
Criteria #1: Excellent Credit Score
Do you have wonderful relationships with your credit card companies? You know: never fighting, no nasty letters exchanged, never any penalties? If so, you probably have a great credit score as well, which is the first thing a lender will check, says Don Frommeyer, president of the National Association of Mortgage Professionals (NAMB).
"A good credit rating is absolutely vital to qualifying for a low rate," he says.
But what's a good credit rating, you ask? Good question. According to Chris L. Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans, you'll need a rating of at least 720 on the Fair Isaac (FICO) scale, which Boulter says is the scale most banks use. The scores run from a low of 300 to a high of 850.
If your credit score is lower than 720, don't worry. You can still qualify for a loan, but it may be offered at a higher rate, says Boulter.
Tips to Qualifying: Not quite where you want to be on the scale? Here are some steps to improve your credit score:
- Pay your bills on time. According to the FICO website, prompt payments are one of the biggest factors in determining your score.
- If you are having trouble making payments, FICO suggests calling creditors to work out a payment plan, or using a credit counseling service.
Criteria #2: Stable Job History
Stability: it's a word that lenders place a lot of emphasis on…especially when it comes to your job.
In fact, Boulter says one way to qualify for a good rate is to be with the same company for at least two years. And if you've changed jobs, lenders want to see that you are still working in the same industry.
"It shows stability," says Boulter. And stability, he says, translates into a "reliable borrower who will pay us back."
But what if you've had a disruption in your employment? The good news: you could still qualify for a mortgage. The bad news: it just might be at a higher interest rate, says Boulter.
Tips to Qualifying: Want the lowest rates? Here are a few pointers:
- If you are self-employed, make sure your job title on your tax return reads the same each year.
- If you were recently promoted or have been in the same job or industry for five years or more, make sure you point that out to your potential lender, says Boulter.
Criteria #3: Sufficient Income
You'd think that banks would want to lend everyone money; after all, they make more money when you pay them back with interest.
But that's the thing: banks need to be sure you can actually afford to pay them back. One way they gauge this? By ensuring you have sufficient income for the mortgage you want.
Of course, lenders realize that people have many monthly expenses, from food and clothing to car loan and credit card payments. So the bank is going to use what they call a debt-to-income ratio to calculate whether you are a good risk for borrowing their money, says Boulter.
To do this, they'll look at certain monthly expenses, such as your new mortgage payment, property taxes, homeowners insurance, credit card payments, car insurance payments, etc. All of this together cannot add up to more than 40 percent of your gross monthly income. Lower is better for getting the best rates, says Boulter.
Tips to Qualifying: Wondering how to improve your debt-to-income ratio?
- If you're self-employed, consider writing off less in your taxes so you effectively "earn" more money.
- Pay down credit cards to lower your monthly payments.
- Shop for less expensive houses to lower your monthly mortgage payment.
Criteria #4: Good Down Payment
Think of your down payment as collateral for your loan.
If you put more money into a down payment, the less risk the lender has of losing money should you stop paying back your loan, also known as defaulting.
So, the higher your down payment, the more at ease lenders will be about lending you money, and the more inclined they'll be to offer you their lowest mortgage interest rates, says Boulter.
But how much is enough?
"Banks want to see a 20 percent down payment," says Boulter. That's the minimum for qualifying for the best rates, he says. It also gets you out of another expense: private mortgage insurance (PMI), which lenders often require if your down payment is less than 20 percent. PMI helps to insure them against you defaulting and costs $50 to $100 a month, according to the Federal Reserve System, which oversees national monetary policy and the banks.
Tips to Qualifying: Here are a few ways to make a larger down payment:
- Consider taking money out of other, under-performing investments to increase your down payment; Boulter advises seeking a financial expert's advice before such a move, however.
- Shop for a less expensive home with the same down payment. That effectively increases the amount of your down payment.
Criteria #5: Adequate Assets
Your bubbly personality might be a great asset at cocktail parties, but it's not going to get you anywhere with a lender. They want to see assets that can be turned into cold hard cash relatively quickly, if you want to qualify for the best interest rates, says Boulter.
"[Lenders] want to know that you can pay your bills and your mortgage should you hit a bump in the road," says Boulter. These bumps he's referring to can include anything from unemployment to unexpected medical expenses.
So how big of a bump do you need reserves for? Boulter says lenders want you to have four to six months worth of reserves - that is assets that are in cash or can be quickly converted to cash. Some examples include stocks, bonds, and retirement accounts.
Tips to Qualifying: Check out these tips on how to increase your assets:
- Though they are not considered liquid, Boulter suggests listing assets such as jewelry, artwork, cars, etc., when applying for a loan. It can't hurt.
- If it's possible to do so without a penalty, convert investments to cash and bolster your savings account. But, says Boulter, this should be done only after consulting a financial expert.