| Three Steps to a Better Mortgage
Rate A home is often the largest purchase people
make in their lifetime. We want to help you
make this important process as easy and as
affordable as possible.
Before applying for a mortgage, there are
a few key things you can do to lower your
interest rates and get a better deal. Reducing
your mortgage rate by just one percent can
save you thousands of dollars!
The first step is to both understand and improve
your credit.
Your credit reports and credit scores play
a major role in your mortgage application.
A lender will almost always check all three
of the major credit reporting companies – based
upon data from Equifax, Experian, and TransUnion,
they will use the middle score to calculate
your rates. A credit score over 650 will help
you get good rates on your mortgage. Having
an even higher credit score (750 or above)
can lower your rates even more.
If your credit score is below 650, you can
try to give it a quick boost by:
Avoiding unnecessary applications for credit
Reducing your credit card balance below 35%
of the credit limit
Keeping your accounts stable
Making all of your payments on time
Correcting negative inaccuracies.
Checking your credit reports and scores 3-6
months before a mortgage application will ensure
that you have enough time to fix any problems
you find.
The second step is to lower the amount you
owe.
Lenders look at the debt-to-income (DTI) ratio
you have to determine how much you can afford
to borrow. This ratio is calculated by dividing
your monthly before tax income by the amount
you use to pay off debts such as auto loans,
student loans, and credit card balances each
month.
Borrowers with a debt-to-income ratio below
30% will have an easier time getting a good
deal on a loan. If your DTI ratio is too high,
you should consider paying off some small loans
(such as electronics or personal loans) or
credit card balances before you apply for a
mortgage. Don’t close the credit card
accounts when you pay them off, however. Closing
credit accounts can damage your credit score.
You can also improve your DTI by increasing
your income. Usually, this is done by co-signing
with a spouse.
The third step is to improve you loan-to-value
ratio.
Your down payment is the third major part of
the interest rate calculation process. In the
lending world, your down payment is calculated
by looking at your loan-to-value (LTV) ratio.
Mortgage Lenders calculate your LTV ratio by
dividing the amount you are asking to borrow
by the price of the home you want to buy. If
you are buying a house for $300,000 and want
a mortgage for $270,000, your loan-to-value
ratio is 90%.
Lenders will prefer borrowers with an LTV
under 80%. Many borrowers in recent years put
down only a 5% down payment or obtained special
financing with a no-down payment loan. It was
very common for first-time borrowers to buy
a home with little or no down payment. Unfortunately,
recent events have brought those types of loans
to a virtual halt. If your LTV is above 80%,
you will probably be expected to pay private
mortgage insurance on your loan. You can improve
your LTV ratio by increasing your down payment
or choosing a less expensive home to purchase.
These three improvements can help you get
or save big on your home loan. Reducing your
interest rate by just one percent can translate
into thousands of dollars in savings over the
life of the loan. As part of your loan preparation,
you can also use these online mortgage
calculators to estimate how much you can afford
to borrow, what rates you deserve, and what
kind of loan is best for you.
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