The aftermath of house hunting and realtor consultations entails filling out a ton of forms and looking for a good mortgage rate. However, the real work in getting your dream house starts long before you begin searching. Our post on ‘How Does a Mortgage Work?’ stresses that what you do prior to purchasing your house can help get you a lower mortgage rate — and something as simple as maintaining a good credit score will greatly influence this.
While it’s impossible to fast-track a good mortgage rate, you can definitely do something to get it as low as you possibly can. The importance of a low mortgage rate cannot be overemphasized. After all, this will influence your financial stability for the next few decades. In this post, we’ll tell you what you need to know to get a mortgage rate that won’t strain your finances for years to come.
Be aware of your credit score
Mortgage lenders largely rely on your credit score to arrive at a mortgage rate that they think fits you the best. More importantly, your credit score dictates whether or not you can apply for a mortgage at all. Therefore, if you’ve got a low credit score, it’s high time to build it up.
The most common way to build credit is with a credit card. An article by Petal Card on ‘How to Build a Credit Score’ points out that credit cards are ideal for those who have a poor track record or for those who have none at all, such as young people, as they will likely still be approved for it. You can also apply for a number of credit cards to up your credit score, but keep in mind that being unable to pay on time can have the reverse effect. So, while you’re encouraged to use your credit card to raise your score, you’ve got to be responsible and make sure that you don’t spend outside your budget.
Employment history is important
Mortgage lenders will only qualify those who have a steady source of income. After all, nobody wants to give out a loan to someone who doesn’t have the means to pay it back. When applying for a mortgage, it’s optimal that you can show proof of consistent employment running back to at least two years. If your history shows that you’ve got a spotty employment record and fluctuating earnings, you’ve got a low probability to have your mortgage application approved. Keeping your source of income in line can help improve your chances of getting approved, as well as lower your mortgage rate.
In the case of self-employed individuals, mortgage lenders are more inclined to impose stringent rules and qualifications. US News explains that lenders comprehensively examine a self-employed person’s income history and business viability to predict if they’ll be able to sustain their loan payments. A good tip for self-employed workers is to show their financial stability in other forms, like good credit or proof of cash reserves.
Prepare your down payment
For the best possible mortgage rates, lenders will usually need at least a 20% down payment of the overall price of your home. This is because the lower your down payment is, the higher risk it carries for mortgage lenders. Hence, your mortgage rate tends to be higher when you opt for a low down payment scheme.
Moreover, your lender will force you to pay PMI, or private mortgage insurance, if you choose a down payment scheme below 20% of your house’s overall value. This will protect the lender if you happen to default on the loan. Business Insider reports that PMIs are usually 0.3-1.2% of the entire loan, which means that it can add a sizable amount to your monthly mortgage payments.
All in all, most factors that affect your final mortgage rate can be easily adjusted by lifestyle changes and mindful decision-making. How you manage your finances will play a big part in your final rate, so make sure that your records leave a good impression on your mortgage lender.
Written by Norma Cobb exclusively for iservelending.com
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