The Lawhead Team would like to share some information on qualifying for the lowest mortgage rates we’ve seen in years.
There are four individual qualification criteria for your mortgage rates – down payment, debt ratio, credit scores, and interest points. Keep in mind, some of these factors can offset others. For example, if you have excellent credit and a large down payment you may be offered the lenders best rate, even if your debt ratios are less than ideal.
Down Payment — Mortgage lenders price their loans largely based on the amount of risk they face. Your down payment is meant to offset some of that risk. By putting more money down, you are also reducing the lender’s investment and risk. This can help you obtain a more favorable interest rate. It seems many lenders offer their lowest mortgage rates to borrowers who put at least 25% down. Keep in mind this is for getting the best rate, not for getting approved. It’s a key distinction. Borrowers can get approved for a loan with a down payment as low as 3.5% (for FHA mortgages) or even 0% (for VA and USDA loans).
Debt Ratio — Lenders will also want to know how much of your gross monthly income you are paying toward your debts. This is referred to as your debt-to-income ratio, or DTI. You have two ratios. Your front-end ratio only includes your housing-related debt. Your back-end ratio considers all of your other debts as well, in addition to your mortgage debt. Borrowers can get approved for a home loan with a back-end DTI ratio of 45%, and sometimes higher. But if you want to qualify for the lowest mortgage rates available, you’ll need a combined debt ratio no higher than 30% (based on what lenders told us). Again, there are exceptions to every rule.
Credit Scores — Your credit score is computed based on the information found within your credit reports. There are several scoring models in use today. The FICO score is the one most commonly used by mortgage lenders. It’s a three-digit number between 300 and 850, and it’s meant to show the lender how much risk you bring the table. Most of the lenders we heard from said they reserve their best mortgage rates for borrowers with FICO scores of 740 or higher. A few set the bar even higher, at 760+. You can obtain your reports for free through AnnualCreditReport.com, and you can get your FICO scores for a small fee through MyFICO.com.
Interest Points — When you take out a loan to buy a house, you will have the option to pay “points” at closing to reduce your interest rate. These discounts points are a form of prepaid interest. One point equals one percent of the loan amount. It’s a trade-off that can work in your favor, if you keep the loan long enough. You pay more up front to secure the lowest possible mortgage rate, thereby reducing the size of your monthly payments. Each point you pay could shave down your interest rate by one-eighth to one-quarter of a percentage point. Most of the lenders we queried reserve their best rates for borrowers who pay at least one point at closing.
Of course there are always other many other variables on top of other variables that can change around your chances of getting the lowest mortgage rates a lender can offer. This list above at least gives you a general idea of a well qualified borrower for 2012.