What’s the largest factor you think about when shopping for a mortgage? If you said the interest rate, you are like most other borrowers. Even ¼ to ½ of a change in the interest rate can have a dramatic effect on your payment. It’s no wonder you want the lowest interest rate possible.
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How do you shop for the most competitive interest rate though? Keep reading to learn some helpful tips.
MAXIMIZE YOUR QUALIFYING FACTORS
Before you even start shopping for the best interest rate, you need to make sure you qualify for that rate. If you have a low credit score, high debt ratio, and unstable income, you aren’t going to be a good candidate for a low interest rate. Instead, you need to look at all three factors and see how you can improve them to increase your chances of getting a good rate.
The factors you should focus on include:
- Credit History – Get a free copy of your credit report here. It won’t show your credit score, but it will show your history. Go over each account and make sure the information is accurate. Is anything on there that doesn’t belong to you? Is any of the information about your accounts incorrect? Write to the credit bureaus to request that the information is changed so that you can help your credit score.
- Credit Score – If you want to know your credit score, you can usually get it from your credit card company or bank. Both types of companies usually offer free access to your credit score. This can give you a ballpark estimate of where you stand. Remember, to get a conventional loan you need at least a 680 and for an FHA loan, you need at least a 580. If your credit score is significantly higher than the minimum, you increase your chances of getting a good interest rate.
- Debt Ratio – Can you pay any of your debts down or completely off? This will decrease your debt ratio, which lowers your risk in the eyes of the lender. See what you can do to get rid of your debt so that all you have to worry about is your mortgage. The fewer debts you have, the lower the interest rate you may get.
- Stable Income – Lenders like stability. It’s best if you have the same job/income for the last two years. If you don’t, you may still get a low interest rate if you can prove that you have what it takes to succeed at the job. For example, if you changed jobs within the same industry, you have the experience necessary to succeed. Lenders look at these little things when determining your ability to secure a good interest rate.
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HAVE A FULL UNDERWRITING PACKAGE
The less work a lender has to do, the more it will work in your benefit. Lenders usually need the same basic documents from you in order to qualify you for a loan. If you have all of your documents ready, the lender can underwrite your loan faster, getting you a response and the chance at securing that low interest rate that you want. At a minimum, provide your lender with:
- Income documents – Paystubs for the last 30 days, W-2s for the last two years, tax returns for the last 2 years
- Asset documents – Provide statements for the last two months for any assets you are going to claim on your application
- Letters of Explanation – If you have any negative events on your credit report or large deposits in your checking account, write a Letter of Explanation right away to let the lender know where you stand. This way they already have their answers when they evaluate your credit/income. This can save time and help you get a lower interest rate because you explained the situation and have hopefully recovered from it.
- Housing history – If you didn’t have a mortgage before, the lender will need some type of housing history from you. If you rented, provide the last 12 months of canceled checks. If you lived with your parents, but paid rent, provide the last 12 months of canceled checks for those payments.
SHOP WITH SEVERAL LENDERS
We suggest that you check your available rates with at least three lenders, if not more. Don’t worry about damaging your credit score by applying with multiple lenders. As long as you apply for them within a short amount of time, the credit bureau will only hit you for one inquiry.
One of the largest benefits of shopping with several lenders is that you can use the quotes from each to negotiate with another lender. This way you have an even better chance at securing the low interest rate that you want.
WORK WITH A MORTGAGE BROKER
If you don’t have the time or patience to apply with several lenders over a period of a few weeks, consider working with a mortgage broker. A broker has access to hundreds of programs, which can make it easier for you to find the program with the best terms and interest rate. This can be especially helpful if you have a unique situation that makes it hard to find a willing lender.
Don’t forget the good old tactic of negotiation. If you have good credit, low debt ratios, and stable employment, you have a good chance of negotiating with lenders. You can even offer to pay a discount point or two if you want to buy the rate down even further than what the lender offers.
In the end, you’ll find it somewhat easy to get the lowest interest rate possible, as long as you are willing to do the work. If you can’t shop with several lenders, enlist the help of a mortgage broker to work on your behalf. Sharpen up those negotiation skills and you should be on your way to a low interest rate.