Get the Best Rate— Mortgage Rate Factors That You Control as a Buyer
Lenders adjust mortgage rates depending on how risky they judge the loan to be. A riskier loan has a higher interest rate. Did you know that you have control over some of these mortgage rate factors?
When judging risk, the lender considers how likely you are to fall behind on payments (or stop making payments altogether), and how much money the lender could lose if the loan goes bad. The major factors are credit score and loan-to-value ratio.
Credit score
The lowest mortgage rates go to borrowers with credit scores of 740 or higher. These borrowers have the broadest choice of loan products.
Interest rates tend to be a little higher for borrowers with credit scores of 700 to 739. For borrowers with credit scores from 620 to 699, mortgage rates are even higher. These borrowers might find it difficult or impossible to get high-amount jumbo loans.
With a credit score below 620, the interest rates are even higher and options are fewer. Most of the loans available at this level are insured or guaranteed by the government.
A couple of ways to improve your credit score are to pay your bills on time and keep your credit-to-debt ratio low. Monitor your credit regularly to catch any discrepancies.
Loan-to-value ratio
The loan-to-value ratio measures the mortgage amount compared with the home's price or value. Let's say you make a $20,000 down payment on a $100,000 house. The mortgage will be $80,000. You're borrowing 80% of the home's value, so your loan-to-value ratio is 80%.
A bigger down payment gives you a smaller loan-to-value ratio, and a smaller down payment gives you a bigger loan-to-value ratio.
If your loan-to-value ratio is greater than 80%, it's considered high, and it puts the lender at greater risk. This may result in a higher mortgage rate, especially when combined with a lower credit score. The loan will usually require mortgage insurance, too.
Your loan to value ratio can be improved by saving more for a down payment or choosing a less expensive home.
Other factors
Lenders may charge more for cash-out refinances, adjustable-rate mortgages and loans on manufactured homes, condominiums, second homes and investment properties because those loans are deemed riskier.
If you’re just ready to begin the loan process or just have questions, I’m here to help. Call Scott Rojo at 916-548-3942.
