Your lender says you qualify for a 5.022% mortgage rate. You feel the rate is OK but are not sure how the lender has come to this figure, much less if this is the best rate you can get.

Getting a better mortgage rate is a big thing. Even a small percentage increase can translate into a saving of tens of thousands of dollars.

Comparison shopping helps you know which lender is ready to offer you the maximum rate. However, it doesn’t guarantee if you’ll get the best mortgage rate. For that, you need to first understand the factors which lenders take into account while calculating the mortgage rate, and by improving how you rank on the most important criteria, you can make lenders offer you an attractive rate.

Key factors which influence the mortgage rate are as follows:

  1. Credit Score

This is the most important criteria for calculating mortgage rate. Nearly always, the higher your credit score, the lower the mortgage rate. A score of 760 or above gets you the best mortgage rate. Usually, the minimum score for mortgage is 620, which will qualify you for a rate of 5.022 percentage or thereabout.

If your credit score is making it difficult for you to get an impressive rate, you might consider postponing buying a new home until it’s got better.

  1. Debt-to-income ratio

There are two ratios that mortgage lenders are interested in: the back-end ratio and front-end ratio. The back-end ratio focuses on all your debts, including the home loan to which you’ve applied. On the other hand, the front-end ratio includes only your housing payment and is calculated by dividing it by your monthly income.

Typically, banks don’t like a back-end ratio that’s greater than 36 percent and a front-end ratio that’s greater than 28 percent. You might be able to win a lower interest rate if your debt-to-income ratio is lower.

  1. Stable employment

Steady employment helps you qualify for mortgage at a good rate. Banks are not likely to be impressed with your loan application if you’ve had long periods of unemployment.

  1. Cash Reserves

Cash reserves, in mortgage terminology, is defined as how many months worth of mortgage payment you have in liquid cash. If you’ve a lot of liquid cash, you might get a good rate, because banks see borrowers with high cash reserves as low risk. You must have at least two months worth of house payment saved in cash to qualify for a loan.

  1. Down payment

A 20 percent or greater down payment can help you get the best mortgage rate. The amount of money you pay upfront is inversely related with the rate.

 


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