As you are likely very aware, interest rates are at an all-time low which makes home buying very attractive. But interest rates will likely not stay this low for much longer. Economists agree that rate increases in the next year are eminent. In the past year mortgage interest rates have bounced between 3.34% and 4.11%. The difference between these two interest rates can mean $25,000 over the course of a 30-year fixed mortgage.
"The rule of thumb we usually use is 1 point interest rate jump equals about $30,000 more over the life of your loan."
The lowest interest rates are available only to the most qualified home buyers. Lenders look at several items when determining the interest rate they plan to offer including:
- Employment stability-- usually two years of constant income, preferably in the same job. There are different rules to the self-employed.
- Debt-to-income ratio--this is the magic ratio that mortgage lenders use to evaluate your borrowing power. For conventional loans Monthly payment, homeowner’s insurance and property taxes, are typically capped at 28% of income and total debt including home costs and all other debt is capped at 36% for a conventional loan.
- Down payment: best case scenario is 20% of the purchase price of the home as a down payment and that garners you a better interest rate. You can put less than 20% down, and there are different loans for this amount. These might not have the best rates, and will charge you additional insurance on a monthly basis.
- Savings: Two months salary in savings are what bankers are looking for, but more or less may be acceptable based on the type of loan for which you are qualified.
- Credit score: the best mortgage rates go to the best credit scores.
Different Credit Scores get different rates and often different types of loans:
- Credit scores of 740 or higher get the best interest rates.
- Credit scores of 620 usually qualify you for a conventional mortgage.
- Federal Housing Administration (FHA) loans can be available to borrowers with scores below 580 with a 10% down payment.
- FHA loans are also available to those with credit scores 580 or higher who can make a down payment of at least 3.5%.
How do I increase my credit score?
- Pay down existing loans.
- Pay past due bills.
- Consistently pay bills on time.
- Find and fix any errors on your credit report.
Working with a mortgage banker at the beginning of your home buying process is crucial to understanding your credit score and purchasing power. They can also advise you as to how to increase your credit score in order to help you get the best rate.
I work with mortgage bankers everyday and can refer you to someone great to help us get started on your home buying search.
This is 5th in my series of articles featuring tips and tricks for first time home buyers.
1rst in the series for First Time Home Buyers
2nd in the series for First Time Home Buyers
3rd in the series for First Time Home Buyers
4th in the series for First Time Home Buyers
//
Comments (2)Subscribe to CommentsComment