One of the most important factors in deciding whether or not you’ll be able to get approved for your dream home purchase is your credit score and history. Mortgage lenders use these numbers to evaluate your ability to repay the loan, and if you have bad credit, you may have difficulty finding a lender willing to work with you. If you want to learn how to get the best mortgage rate, here are five steps that will help guide you along the way.
1) Check your Credit
Before you even begin shopping for a mortgage, it’s important to ensure that your credit score is where it needs to be. Most lenders will use your FICO score as an initial assessment of whether or not you can get a loan. If your score is too low, you may need to take steps before applying for a mortgage. Before applying for a mortgage, make sure your credit report is accurate and up-to-date. Inaccurate information on your credit report can result in lower scores—but with a little effort, any problems with inaccuracies on your credit reports should be fixed quickly. Checking online for free annual credit reports from Experian, Equifax, and TransUnion allows you to identify any problems on those three bureaus’ records so they can be corrected.
2) Determine Your Income
First, it’s important to figure out your monthly income. While some brokers will work with you regardless of your salary, they may require a minimum threshold in order for them to be able to help you with buying a home. If you have reliable sources of income that are guaranteed for at least 3-6 months into the future, then your income is likely sufficient. In other words, if you know you’ll be getting a raise or promotion soon and can prove that these pay increases will last, then you might not need to provide proof. Otherwise, find proof of income by pulling recent pay stubs from your most recent job or producing a recent W2 form from previous jobs. Pay stubs typically show 2-3 months worth of full pay earned by month; while W2 forms show an entire year.
3) Work with a Mortgage Broker
A mortgage broker has access to hundreds of different banks and lenders. As such, they can generally get you a better rate than you could ever get on your own or even with a bank. It may seem counterintuitive to pay someone else for their expertise—but it’s an easy way to save thousands of dollars in the long run. Work with a reputable broker who charges by commission instead of through fees; never work with one who charges fees upfront. The only exception to this rule is a small charge for credit checks. This is pretty universal and a normal part of the process.
4) Understand What Makes Rates Change
Rates change frequently. Many factors can affect them, including external economic indicators, like inflation and unemployment rates. As a homebuyer or homeowner, it’s important to understand what drives these numbers so you can choose a mortgage that will save you money over time. This is easier said than done—rates fluctuate based on financial terms that aren’t necessarily intuitive. To simplify things, it’s good practice to look at current interest rates from multiple lenders through your broker. Use an online mortgage calculator for easy comparisons, like the one we have available here.
5) Determine Your Down Payment
The larger your down payment, typically, the better mortgage rate you’ll be able to qualify for. Be sure that you have some cash on hand before beginning your hunt for a home loan; many first-time buyers are surprised at how quickly they burn through their savings. A good rule of thumb is to aim for a 20% down payment so that you have some money left over in case unforeseen expenses arise during the buying process. For example, if your budget calls for $30,000 as a down payment and closing costs of $7,500 plus 10% of the purchase price for miscellaneous items, you should save closer to $50,000 as a cushion . It will also look better on paper if you show extra funds available.
With React Mortgage, we can help you get the best rate possible. Just scroll down and find your rate with our 20-second pre-qualification application!