Mortgage rates have started to slowly climb, but to be fair, they’re still close to all-time lows (see the lowest rates you can afford here). And the pros predict more interest rate increases this year, which makes locking in the lowest rate on a new loan attractive. So we asked experts to share what you need to do to make sure you get the best mortgage rates.
1. Increase your credit score as much as possible
Generally, the higher your credit score, the better your interest rate. According to data from LendingTree, borrowers with credit scores of 760 or higher were offered an average APR 16 basis points lower than the average rate of borrowers with scores between 680 and 719. One basis point equals 0.01% and therefore one hundred basis points equals 1%.
To increase your credit score, check your credit report for errors (and dispute them), pay your bills on time, and reduce the amount of your debt. Also, it’s important that you don’t ask for too many new lines of credit when trying to get a mortgage, as this could hurt your score.
2. Get your finances in order
A lender will want to thoroughly assess the likelihood of you repaying the loan, and to understand this they go beyond your credit score and take a deep look at your finances. This means that you will want to pay off significant debts and have a good understanding of your overall financial situation from your income.
Understand your debt-to-income ratio (a DTI is your total monthly debt amount divided by your gross monthly income) and know that lenders typically want one that’s 43% or less of your assets. To show steady income, start by establishing a Record of Employment and be prepared to show pay stubs from at least 30 days prior to your application date as well as W-2s for the past two years. Self-employed people or those with multiple gigs may need to submit profit and loss statements in addition to tax returns to show a stable work history.
This guide explains in detail what mortgage lenders are looking for when it comes to your credit score and finances.
3. Save big for your down payment
Making a larger down payment can allow for better rates because the lender is taking on less risk. And putting more down probably means you won’t have to pay for private mortgage insurance which can range from 0.05% to 1% of the original loan amount each year if you put down less than 20%.
4. Get quotes from 3-5 lenders
Greg McBride, chief financial analyst at Bankrate, recommends comparing three to five lenders to see who offers the best interest rates (see the lowest rates you can qualify for here) and other terms like points, fresh and more. “Be sure to look at closing costs, fees, points, and tax credits. This can get a little overwhelming, so if you have a financial planner, be sure to include that in the discussion,” says Jen Grant, Certified Financial Planner at Perryman Financial Advisory.
“Collect all your price quotes on the same day. Rates fluctuate daily, and lenders should be able to give you their best rate upfront,” says Denny Ceizyk, Senior Writer at LendingTree.
5. Lock rate
Locking in your mortgage rate from the start means your lender can’t raise your interest rate between the time you apply for a loan and the time you’re approved. That way, if the market fluctuates during the application process, you’ll be spared from paying higher interest rates if they go up.
6. Weigh the pros and cons of buying points
Rebate points are fees that borrowers pay upfront to reduce the interest rate on their mortgage. Typically, a point costs 1% of your mortgage amount, and each point reduces the interest rate on the loan by an eighth to a quarter of a percent. “The lowest rates quoted often come with mortgage points, a minimum loan amount required, or a certain amount of equity,” Ceizyk says. But note that buying cashback points isn’t always worth it, as your break-even point may be years later; if you’re not planning on staying in your home very long, think twice.
7. Consider programs for first-time buyers
With supports such as down payment assistance, funds available for repairs and renovations, interest-free second loans and reduced interest rates, homeownership programs are designed to attract new residents in specific areas. States like California, Florida, Illinois and New York offer programs to help reduce the costs associated with taking out a new mortgage and some states even offer tax credits that can be used on your federal tax return. FHA loans, USDA loans, and VA loans are some of the most common types of loans for buyers with weaker credit and lower down payments.
8. Request a shorter loan term
Shorter loan terms, such as 15-year loans, may offer better rates than longer-term, 30-year loans. “Lenders assess loans based on risk. If you can pay off your loan faster with a higher payment, lenders reward you with a lower payment because as your balance is paid down, there is less risk that you will default,” says Ceizyk.