If you're looking to refinance your mortgage or apply for your first home loan, chances are you're hoping to score a low interest rate.
And why wouldn't you, with 30-year fixed rate mortgages averaging less than 4 percent all but one week in 2012, according to data by Freddie Mac.
Unfortunately, not everyone can qualify for these super low rates. And if you fall into this boat, don't give up just yet. We've compiled a list of probable reasons why you can't get a low interest rate, and more importantly, what you can do to fix it.
Keep reading to learn more...
Reason #1: You have bad credit
Hands-down, a borrower's credit rating might be the most influential indicator of one's ability to either "score" a low mortgage interest rate or qualify for a loan at all.
"If your credit scores are not high enough, you might be out of luck," says Adam Stirba, a loan originator with Capitol City Mortgage of Lincoln, Nebraska.
What makes credit scores so important in relation to interest rates?
According to Stirba, lenders use them as barometers to help determine a borrower's ability to repay a loan. Thus, people with the highest credit scores typically qualify for the lowest interest rates and closing costs because they are deemed more "credit worthy."
FICO scores, the numerical scoring system used by most lenders, range from 300-850 and are calculated by a number of credit factors, including payment history, amounts owed, and types of credit used.
Stirba says lenders view scores at 740 and above as optimal for borrowers who want to qualify for the lowest interest rates.
Possible solutions: If you don't have a score of 740 and above, myFico.com, the company's consumer website, says there are a number of ways you can improve your credit score. For starters, myFICO suggests measures such as setting up payment reminders to help you avoid late payments, reducing the amount of debt you owe, keeping balances low on credit cards, and paying off debt as opposed to moving it around.
Reason #2: You've had an unstable job history
Stirba says your job history - or income stability - could have a major influence on why you can't qualify for a loan.
"Two years of job history is definitely preferred by lenders," Stirba says. "If there is more than a 30-day gap in job history, that can be a problem."
So, why is job history so important? The U.S. Department of Housing and Urban Development (HUD) reports on its website that job history is among several "compensating factors" that can help demonstrate a borrower's ability to repay a loan.
The dilemma is that if a lender is on the fence about your loan qualifications - because of your credit history - compensating factors can be used to help offset weak factors, according to HUD. So, having an unstable job history could be the determining factor on whether or not you get a home loan.
Possible solutions: "There are a lot of different scenarios lenders will consider," Stirba says in reference to a borrower's job history. "If [borrowers] are in the same line of work with multiple job changes, typically that's not a bad thing. A lot of times, it's just a matter of working."
Stirba adds lenders might be forgiving of gaps in job history if, for example, you are someone who has had to stay at home to raise a family or needed to stop work for medical reasons. The responsibility would be on the borrower to prove these were legitimate instances for missing work.
Reason #3: Your expenses outweigh your income
Are you in the habit of spending more money than you make? If so, you could be asking for trouble when trying to qualify for a home loan using your debt-to-income ratio.
HUD's website defines your debt-to-income ratio as "a comparison or ratio of gross income to housing and non-housing expenses."
According to Stirba, lenders view a borrower's debt-to-income ratio as a crucial factor in determining whether you can purchase a loan. The more debt you have in relation to your income, the less chance you have of meeting loan-qualifying standards.
"Debt-to-income ratio is going to be one of the main things to show you have stability of income," Stirba says. "This doesn't affect your interest rate as much as it does qualifying for a loan."
Possible solutions: If too much debt is stopping you from getting a low mortgage rate or simply qualifying for one, Stirba offers this advice: "If they can free up a couple hundred dollars a month to apply to other outstanding debts, they can have their other outstanding debt paid off quicker."
Essentially, you should try to pay down your debt wisely.
Reason #4: The loan program you're seeking is not a good fit
Loan programs come in more flavors than most ice cream shops carry. For this reason, you need to get a good sense of why - and how - different ones can influence the "taste" of your interest rate.
"You want to make sure that you are obtaining the program, rate, and strategy that best fits your financial needs," says Bill Burnett, president of the Virginia Association of Mortgage Brokers (VAMB). "If you don't do that, you could pay a higher interest rate or you could be put into an inappropriate loan program that could cost you tens of thousands of dollars, literally."
And if case you're wondering, a mortgage program is a group of characteristics ascribed to a specific mortgage, such as the term length and initial rate period.
So if you don't have an understanding of a program's relationship to your interest, you could get stuck with a rate that takes two hands to count.
Possible solutions: If you are unhappy with the interest rate of a potential mortgage loan, you might want to consider shopping around for a program that better suits your needs. That means contacting different lenders to get a rate and loan terms that are a comfortable fit for you.
"A mortgage - whether it's a home purchase, a refinancing, or a home equity loan - is a product, just like a car, so the price and terms may be negotiable," says HUD's booklet "Looking for the Best Mortgage." "You'll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars."
- interest rates
- fixed rate mortgages