Laying the groundwork for the best mortgage is critically important
With mortgage rates having doubled in early 2022, getting the lowest rate possible could mean the difference in buying a home or, at the very least, making it much more affordable. Some people are waiting for rates to come down, and while they are expected to come down some this year, most experts agree that they’ll never return to the three or even four-percent range.
There are things a buyer can do to be eligible for the best rate available. Obtaining the most favorable terms is based on the loan-to-value, your credit rating, and your ability to repay the mortgage.
While lenders can impose their underwriting criteria, the basic qualifying guidelines are identified as the 4 Cs: This is all part of laying the groundwork for the best mortgage.
- Capital – money, savings, plus other investments providing for a down payment, closing costs, and reserves for unexpected expenses in the future. It could also include gifts from family members, grants, and down payment assistance.
- Capacity – the ability to pay back the loan. Lenders look at income, job stability, savings, monthly debt payments, and other obligations to approve a borrower for a mortgage. They’ll ask for several years of tax returns, W2s, and current pay stubs. Self-employed borrowers require additional documentation. Some of the recurring debt can include car payments, student loans, credit card payments, personal loans, child support, alimony, and other debts, which could include co-signing for another’s debt.
- Credit – your credit history and score exhibit your proven experience paying bills and debts on time. While there are minimum credit scores for different types of mortgages, the best rates are only available to borrowers with the best credit scores. Credit ratings are established over time, and borrowers should improve their scores before using them.
- Collateral … lenders look to the value of the home and other possessions when pledged as security for the loan.
Based on the Ability-To-Repay Rule, effective 1/10/2014, financial information must be supplied and verified; the borrower must have sufficient assets or income to pay back the loan; and teaser rates can no longer hide a mortgage’s true cost. Even after a lender gives a loan approval to a borrower, they will generally run additional verifications a few days before the closing to ensure that nothing has changed that would affect their underwriting decision.
The financial preparation for homebuyers begins long before they start looking at homes. They need to be aware of their credit by asking for copies of their credit reports from the three major reporting agencies: Experian, TransUnion, and Equifax. Congress mandated consumers be provided this free service through AnnualCreditReport.com. Other websites may offer free services, but their real objective may be to encourage you to purchase additional services.
Once you’ve received the credit reports, read them to discover errors that could negatively affect your credit score. The website will tell you how to correct the errors, including notifying the credit bureau and the reporting party of the error.
Most borrowers understand that payment history is the major contributor to a credit score; it is expected of borrowers to pay on time and as agreed. Sometimes, borrowers are surprised to find out that if their borrowing approaches their available credit, it could hurt their score.
The credit utilization ratio is the percentage of credit used to that which is available. If you had $10,000 credit available and your balance on a credit card was $2,500, the ratio would be 25%. Ideally, lenders want your credit utilization to be below 25%. Again, this could be one of the things you work on before you meet with a mortgage officer.
Once you have an accurate credit report and have saved for the down payment and closing costs, you’re ready to meet with a trusted mortgage professional who can take you through the pre-approval process. They may be able to suggest things you can do to raise your credit score to be eligible for a lower mortgage rate.
All lenders are not the same, and there is a significant difference between online lenders with limited counseling advice and working with a local mortgage officer; you can discuss your situation face-to-face and if it can be improved.
You may feel comfortable with more than one recommendation, and your agent will be able to supply you with lenders they are familiar with from their experience in situations like yours.
Laying the Groundwork for the best mortgage pays you big dividends, particularly over the life of the loan. Do the work to put yourself in the best position to lower your rate and reduce your risk of not being able to complete the purchase of your dream home.
Here is another article you may want to consider. Things your buyer broker does for you.