Everyday, I have potential clients bombard me with that simple question. What's your Best Interest Rate? When I explain to them that I need a little more information, the first thing they say is that I have great credit. They fail to realize that's not the only factor. While the credit score is a very big part of getting a very competitive rate, keep in mind that this is not the only factor in determining the interest rate for your loan. All rates are based on a combination of several "Risk Factors". The lower the risk of the borrower, the lower the rate. Listed below are the factors that affect how low of a rate you will receive on your next loan.
- Credit Score/Credit
- The biggest determining factor of the rate you will get. Mortgage companies, such as FinanceMyHome.com, use the middle score (the 2nd highest score from the 3 main credit repositories: Equifax, Experian, and TransUnion) and not the average.
- Rates are generally graded in several different tiers. They are:
- 740 and above - EXCELLENT
- 700 - 739 - Very Good
- 680 - 699 - Good
- 660 - 679 - Acceptable
- 640 - 659 - Fair
- 620 - 639 - Poor
- 619 & below - Very Poor
- The lower the tier, the higher the risk. If your score's too low, certain programs and loans are unavailable or are offered only if your other risk factors are low.
- Judgments, late payments, disputed accounts, and other recent derogatory accounts can disqualify you from obtaining a loan even if your score is high. Depending on the program and lender you select, if a certain amount of time has passed, many lenders will ignore the past issues you may have had.
- Loan Amount/Equity
- The more equity you have (be it existing equity in your home or your down payment) the lower your risk.
- In some cases, if you do not have enough equity or down payment, certain programs are unavailable to you or you will have to pay Mortgage Insurance.
- Income and Debt Ratios
- Your Debt to Income Ratio (how much your monthly debts are compared to your monthly income) makes a huge difference in the ability for a lender to lend. If your debt load exceeds certain thresholds, you may not qualify for a loan.
- Term and Program
- Depending on the loan you select (FHA, VA, Conventional, etc.) your limitations will vary. Government loans generally have less stringent requirements and offer more flexibility when it comes to risk factors. Conventional loans are very specific on what you can and cannot do and rarely deviate from the standard guidelines. Furthermore, depending on the lender, Government loans offer higher tolerances when it comes to higher ratios and lower credit scores and equity.
- Since shorter terms reduce the overall risk of a loan, many 15 year and 10 year loan programs come with lower rates. However, the higher monthly payment deters borrowers from going with this option.
- Closing Costs
- Origination, discount points, and lender fees can determine how low you can get your rate. If you prefer to buy down your rate by purchasing points, make sure that the money you are spending equates to a substantial savings over the course of your loan.
I hope this helps you in understanding on how rates are determined. I get many calls from potential clients that want me to quote them a rate. However, as you can there's more than one aspect to determine rates. If you deal with someone who's willing to quote you a rate without getting a complete application and knowing the bare minimum, you are doing yourself a disservice. More than less likely, the rate he/she quoted you will not apply to your situation. The lowest rate isn't always what you can qualify for. But if you do your homework you'll be sure to get the best rate you qualify for.
If there's anything I can do to help with your current purchase or refinance, please don't hesitate to contact me.
James Jeter | Mortgage Loan Originator | NMLS #365858
12005 Ford Road, 8th Floor Dallas, TX 75234
O: 866-277-3088 Ext. 3361
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my personal views and they do not reflect those of
FinanceMyHome.com, REMN, Inc. or it's affiliates.
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This is not a commitment to lend. All loans are subject
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Please contact lender for details.