How to get the best mortgage rate? (September 2022)
Housing and real estate prices, in general, have risen quite sharply after many global impact events that have taken place over the past few years. This has also led to soaring interest rates for home loans, and in this case, it is crucial to do your research and find the best possible mortgage rate before you move.
After all, your mortgage rate will directly influence how much you’ll have to pay each month for a long number of years to come, not to mention the total amount you’ll pay over the life of your loan. Interest rates are influenced by a number of factors, from your credit score, to the down payment you can afford, to the term of the loan, the total value of the home you want to buy, etc
So, to help you find the best possible deal, we’ve put together a guide on what to do to get the lowest mortgage rate on the market today.
Get the best rate for your mortgage
If you’re considering your options for your next mortgage, your priority should be finding the best deal available and making sure you can get your loan application approved. There are three things you need to focus on – having the best credit rating you can get, maximizing your income, and finally – making sure you have assets, which can mean a lot.
To ensure all of this, we recommend the following seven-step process that you should consider following.
- Boost your credit score
- Build a strong employment record
- Set aside as much money as possible for your down payment
- Understand how the debt to income ratio works and what yours is
- Try getting a 15-year fixed rate mortgage
- Compare offers from several lenders
- Block your rate
Now, let’s take a closer look at each of these steps and see what they mean and include.
1. Boost your credit score
Your first step will be to increase your credit score. While a low credit score won’t automatically prevent you from applying for a loan or even getting one, your chances of getting one will be reduced if your credit score is low. At the very least, even if you get the loan, a better credit score can lead to a lower mortgage rate and generally more economical borrowing terms.
Basically, your credit score is always an important factor, whether you’re taking out a loan or renting an apartment, looking for a job, and in hundreds of other scenarios. From what we’ve seen, the best mortgage rates are always received by those with high credit scores, typically 740 or higher. Your goal is to make lenders confident in your ability to pay your dues on time, and the more they trust you, the lower your interest rates will be.
Obviously, that means you can improve it by paying other things on time, like your bills, credit card balances, etc. You can increase it further by making sure you don’t spend more than 20-30% of your credit limit. It’s basically about responsible spending and timely payments. Stick to them and your credit score will improve in no time.
One way to increase your score is to apply for a secured credit card.
2. Build a strong employment record
Another thing that will make you more attractive to lenders is the guarantee that you will have at least two years of stable employment and regular income, preferably from the same employer. This way they don’t have to worry about whether you’ll be able to make regular payments. For this purpose, you may need to submit pay stubs at least 30 days prior to your mortgage application.
It is also a good idea to prepare W-2s from the previous two years. Proof of any bonuses or commissions is also a good thing to have. Now, if you’re self-employed or work part-time multiple times and your payments are split, things can get a little more complicated. However, it is not impossible to obtain good interest rates even under these circumstances. Anyone who is self-employed will likely need to provide their business documents and provide tax returns, income statements, etc.
Even graduates who are just beginning their careers or those who have been out of work for some time can be included, provided they have a formal job offer in hand, provided the offer includes the amount they are entitled to. Will be paid. And while gaps in your work history can be problematic, they won’t necessarily disqualify you. However, the length of the gaps is important, so lenders won’t pay too much attention to any interruptions in your working relationship due to things like illness. A simple explanation will cover it, and you’ll be fine. However, gaps that last six months or more will make it harder to get approved.
3. Set aside as much money as possible for your down payment
Down payment is mandatory for most mortgages, and generally speaking, the more money you can afford to pay down, the lower your rates will be. Lenders offer much better terms to those who can cover around 20% of the loan with a down payment. Of course, they will also accept lower down payments, but if you can afford less than 20%, this will usually require you to pay private mortgage insurance as well, and this can range from 0.05% to 1%, or even more than the original loan amount, per year.
In other words, if you can save the money to cover 20% or more with your down payment, you’ll avoid a lot of extra payments and a lot of trouble for yourself, so that’s definitely something to think about.
4. Understand how the debt to income ratio works and what yours is
In lending, there’s something called the debt-to-income ratio, or DTI. Essentially, this compares your debt to the amount of money you earn. To be even more specific, the ratio compares your total monthly debt payment to your gross monthly income to determine whether you can afford the payment or not.
Generally speaking, the DTI should be as low as possible, as lenders prefer to work with those with higher incomes. If your monthly debt is only a small portion of your salary, it increases your chances of being able to pay regularly and on time. On the other hand, the higher your DTI, the more your income must be allocated to paying off the debt, which leads lenders to wonder whether you will prioritize paying your dues before other needs or not.
Usually, lenders avoid making loans whose monthly payments would require more than 28% of the borrower’s monthly income, so your overall DTI must be less than 36% to be considered seriously. This is also where different types of loans should be considered, as conventional loans can be received for a maximum DTI of 45%, while maximum FHA loans require the DTI to be less than 43%. As always, there may be exceptions, but that’s not something you should count on.
5. Try getting a 15-year fixed rate mortgage
The most common fixed rate mortgages tend to be for 30 years. However, if you think your new home will be long-term and you are confident in the stability of your cash flow, we recommend that you consider a 15-year fixed rate mortgage. This way, you’ll pay off your house sooner and pay off your debts in half the time you normally would. Another thing to consider is to opt for a 15-year term if you are refinancing a mortgage.
6. Compare offers from several lenders
As mentioned earlier, you should consider different mortgages in order to find the best deal, no doubt about it. However, once you have decided on a mortgage, you should also consult several lenders, their terms, requirements, etc., as you will find that these aspects may differ from company to company. Studies have shown that borrowers can save $1,500 on average by getting just one additional rate quote and $3,000 on average if they get five.
In other words, it may pay to look beyond your bank or credit union and shop around a bit.
7. Lock your rate
Finally, we recommend that you lock in your rate as soon as possible. This is because the closing process can be lengthy, often taking several weeks. It’s during these weeks that rates can fluctuate, and you might end up paying more than expected because of this. It doesn’t hurt to ask your lender to lock in your rate, because then you’ll know exactly how much you have to pay. And while there may be a charge for this service, you’ll likely pay less than you’d have to set aside if rates go up at the wrong time.
What’s your next step?
Now that you know all of this, you can research different loan opportunities, compare rates, and take one step closer to securing an affordable mortgage. That said, here’s what to expect next.
After applying for a mortgage loan, you will receive a loan estimate within three days, generally. This estimate will detail all the details of your mortgage, including things like closing costs. However, keep in mind that these are only estimates for now and that the final figures may be different depending on the market evolution at the time of the signing of the agreement.
Next, your lender will review your application to determine if they should approve the mortgage. During this time, you may receive requests for additional documentation or additional questions. Be prepared for this and be as responsive and detailed as possible to improve your chances. Do not try to hide anything and maintain your financial and professional situation. Also, do not apply for new credit, do not make major purchases and above all do not try to change jobs during this period.
Then, if your mortgage is approved, you’ll be one step closer to closing and buying your new home. However, if your loan is declined, you should try to understand what led to this decision and then reapply with another lender once you have dealt with what caused the original lender to reject you. However, we recommend that you wait a bit before trying again, as this could hurt your credit score.