Qualifying for a mortgage loan is just one step in the process. The next step is securing a lower interest rate, which saves you money both now and over time. That's why it's essential to consider from the start where you stand in relation to certain critical factors that have an effect on the mortgage rate you pay.
Higher Credit Score
One thing a lender is going to look at for certain when you apply for a mortgage loan is your credit score. Your credit score may be good enough to qualify you for a loan, but the interest rate you pay depends on the specific number that makes up your FICO score–the credit score lenders generally use when weighing a borrower's credit risk. Although you may still qualify for a mortgage loan even with a not quite spectacular credit score, plan on paying a higher rate of interest.
On the other hand, a high credit score will get you a lower interest rate, which will lower your monthly payment and the total amount of interest you will pay over the life of the loan. That number may not be at the forefront of your thoughts at the time you are buying your dream home, but it can save you tens of thousands of dollars by the time you pay off the mortgage loan.
Bigger Down Payment
Even if you have a high credit score, a bigger down payment lowers the risk to the lender more. In return, you get offered a lower interest rate. By making a larger down payment, you show the lender that you are willing to share the risk–a step that makes you a more attractive borrower. Putting more money down on a home you purchase also lowers both the amount of principal and interest you pay each month, which will save you money over time, especially if you plan to live in it for many years.
While the interest rate reduction you get with a higher down payment varies by lender, borrowing less money decreases your loan-to-value ratio and the interest rate you pay. If the amount of money you want to borrow is less than the amount at which the home is appraised, you have equity in the property from the start; therefore, a lender sees you as a lower risk and less likely to default on the loan.
More Income and Less Debt
Both your income and stable employment play key roles in the interest rate you pay. If you've changed jobs or seen your income decline over recent years, you're going to have a tougher time getting approved for a loan. Lenders such as TruPartner Credit Union like to see stable or rising income when it comes to your earnings history.
Self-employment can hurt your chances too, as lenders prefer to calculate true income. So if you're self-employed and take tax deductions the IRS allows for business expenses, the tax returns the lender requests as proof of income may make it appear as if you earn less income than you do. Writing off fewer expenses and showing increasing business income from year to year can increase your chances of getting approved for a mortgage and at a more competitive rate.
In addition to your income, a lender will consider your debt-to-income (DTI) ratios when reviewing your loan application. A bank, credit union, or other mortgage lender will compare your gross monthly income to the total amount of your monthly debt payments–including a monthly mortgage payment.
Some lenders also calculate your housing costs alone in determining whether you can afford the mortgage payments. Although sometimes lender will allow you a higher DTI ratio if your application is strong in other areas, owing a low amount of debt may get you a lower interest rate.