What Factors Affect Your Mortgage Rate?
Several factors go into the equation when a lender makes you a mortgage rate offer. Some of the most important ones are:
- Employment Regularity
It’s important for you to show that you are consistently earning an income, so employment stability is critical. Most lenders want at least 2 years of employment either at the same job or at an increasing salary ratio (meaning you left your job because you got offered a higher salary elsewhere). Self-employment is much stricter, so be sure to have all of your tax forms and income documentation in order before applying for a mortgage if you are self-employed.
- Credit Score
This is probably the biggest factor (but not the only one) lenders consider. A high credit score will ensure that you are approved more easily and will give you more options to choose from. Anything lower than 620 will make it much more difficult to find a lender to approve you for the loan, and will likely come with several stipulations such as high APRs and a significant down payment. FHA and other government-dictated loans have more lenient terms, so someone with a credit score of 580 can still get approved for a loan.
Your debt to income ratio is another important factor that lenders consider. This is a calculation of how much debt you have (including monthly payments you make, other loans, other types of debt, and the mortgage you are applying for) divided by your gross monthly income. The maximum DTI that most lenders will accept is 36%, though you can frequently find lenders that will give higher ratios, particularly if you are in good standing in all other areas of consideration. The lower your DTI, the lower your interest rate will generally be.
- Down payment
Sometimes, lenders will let people with lower credit scores compensate for the lack by putting down a larger down payment. Essentially this lowers the mortgage loan amount, making you less of a risk overall. The higher the down payment, the better rates you’ll receive. To get the best mortgage rates available, you’ll need to put down 20% or more of the loan. Additionally, a down payment below 20% will require you to pay private mortgage insurance (PMI). This can translate to a lot of money added to your monthly and annual payments, so do the math when you’re looking at loans.
- Size of the Loan
The larger the loan you wish to take, the greater the risk you pose to the lender. Therefore, if you want to take out more money, you are going to be charged a higher interest rate in order to cover the greater risk.
- Additional Terms
Additionally, lenders will look at other factors such as cash reserve, length of repayment terms, and home location. All of these factors combined will create your personalized mortgage rate.