Sure you’ve been hearing that mortgage rates have dropped to historically low levels. But have you tried to get a mortgage with those super low rates lately? If you have, chances are you didn’t qualify for the best deal.
According to data surveying 200 of the nations top mortgage lenders, the actual interest rate granted to most borrowers averages almost three-quarters of a percent higher than the lowest available rate. That may not sound like a lot, but over the life of a 30 year mortgage this small difference will add tens of thousands of dollars to the cost of financing a mortgage.
Most folks would expect to get the lowest rates if they have a high credit score. But these days a good credit score is only one piece of the mortgage puzzle.
Today lenders are looking at a whole variety of factors, including the amount the borrower has for the down payment. If the loan is only 80% of the purchase price of the property, and you have income that is fully documented, and your credit score is well above 700, you might have a pretty good shot at the lowest advertised mortgage rates. And it will definitely help you if you have savings or other liquid assets like a 401K.
Lenders are looking for lower loan to value ratios, which basically means, the higher your down payment, the better. Down payments of 20% are becoming the new “normal” with mortgages these days. A lender will check to see what other debts you owe, and how much of your income those debts are taking. The lower your debt-to-income ratio, the better. You may have a great credit score, but if you are already paying for two cars and a few credit cards, you’ll need to be able to prove that you’ve got plenty of income to cover the mortgage expense. And hopefully you’ve had that income for a number of years. If you’ve only been on your present job for a short time, chances are you’ll be quoted a higher interest rate than someone who’s been doing the same job for 10 years.
Since the credit crisis, there are fewer lenders, meaning less competition, so lenders can afford to be more picky about handing out loans with the lowest rates. Most lenders have been trying to increase their profit margins by keeping the rate spread a bit higher than it used to be. The competition in mortgage lending simply is not as intense as it was four years ago. Lenders are saving the best rates for those who can exceed the minimum underwriting requirements. It’s no longer just a matter of having a great credit score.
To be sure you are getting the lowest possible rate, compare quotes from at least two different mortgage lenders, or find a quality mortgage broker who can shop for the best deal on your behalf. Check your credit report before you apply, and be sure there are no unexpected surprises or mistakes.
Have your income documentation together, including three years worth of tax returns, and have clear documentation showing where all of your income is coming from. If you have 20% to put down on the property, so much the better. If you don’t, you’ll probably be quoted a higher rate. Those with less than 20% down may have to pay for mortgage insurance, which will add more cost to your loan. For those with less than 10% down, FHA or VA is probably your best bet. The rate will be low relative to historical levels, but you probably shouldn’t expect the lowest advertised rates. As usual, those are reserved for borrowers who have plenty of cash, excellent credit scores and lots of documented income.