No doubt you’re aware that mortgage rates have been low throughout 2010. You’ve also probably heard that this past winter has seen interest rates dip to record lows for the modern era. But you may have also heard that some buyers or refinancing homeowners are having difficulty obtaining loans at the lowest advertised rates. The loan application process is much more rigorous than in years past and the processing time for loan applications has grown.
How can you know whether or not you realistically qualify for the great rates being advertised? Remember that lenders are all about assessing risk – they are looking for applicants with a very low risk of defaulting on their loan. There are five key factors that a mortgage broker will look at when determining the rate you will pay on the loan:
Down Payment
Mortgages can still be obtained with low money down, but having a 20 percent down payment is the best bet if you hope to obtain the best interest rates. If you can afford to make a down payment in excess of 20 percent on the house, you will be in an even better position to take advantage of the lowest mortgage rates.
Assets
Lenders these days are going to be very exacting when reviewing your financial records. They will want to verify that you have the necessary cash to cover the down payment and closing costs. Banks will also want to make sure you have some amount of cash buffer as an insurance policy of sorts. All of this will need to be proven with extensive documentation, and many lenders will want to review several months’ worth of your account statements. Lenders will also ask for copies of recent tax returns.
Credit Score
It’s no secret that the strength of your credit score greatly affects the type of loan you will qualify for. The magic number to aim for is a FICO score of 700 or better. Clearing the 700 benchmark will qualify you for the best mortgage rates, while a score even just a few points below 700 can cost you as much of a quarter of a point in interest, which equates to thousands of dollars over the life of the loan.
Job Security
Not surprisingly, lenders will want to make sure that your career situation is stable enough that you will be able to continue to make the loan payments on into the future. Banks will want to see documentation to indicate how long you have been with your current employer. Ideally, you will have two years or more employed by the same company.
Loan Type & Loan Length
Adjustable mortgages have lower initial rates overall than fixed-rate loans. FHA loans will typically have a higher interest rate, as will jumbo loans (mortgages taken out on higher-priced homes). As a rule of thumb, fixed rate loans will have higher interest rates as the length of the loan increases, so a 10 year fixed rate loan will have a lower rate than a 15 year mortgage, which will in turn be lower than a 30-year fixed loan. And all mortgage rates vary from state to state and even from city to city, so the rates you see advertised nationally may not be relevant to your search for the right loan.
