Getting a home loan is hard enough. Getting a successful, low interest home loan is a feat all on its own. There are so many moving parts to purchasing a home that any advantage you can gain could mean hundreds or thousands of dollars saved each month in interest over a 30-year fixed mortgage. Below are twelve things you should do or not do to get a lower rate.
DO: PAY TO PLAY
Down payment is a key point of interest to a lender. How much skin are you willing to put in the game? Where are you in your financial situation? How much you put down towards your home will answer those questions for a lender. The more money you put in, the more serious you will appear as a buyer and the more financially stable you will appear to the banks. 20% is the ideal minimum to put down as it removes the need for mortgage insurance. You can read about that in more detail in 15 Things Your Realtor Wishes You Knew About Home Loans. Appearing more stable and putting your own money into your home mitigates the risk for a lender and makes your profile easier to fit in an interest bracket.
DO: UNDERSTAND YOUR OPTIONS
Do your research. Understanding what an Adjustable Rate Mortgage (ARM) is, what options it comes with, and what a fixed 30 year mortgage is matters. Know the lingo so when your realtor or the lender talks to you, you can make an informed decision. Your life plans might not be traditional so a 30-year fixed might not make sense. You won’t know until you research all of it. This could save you thousands. Also, depending on the options you select, you could get a much lower rate than your traditional fixed mortgage.
DO: GET PRE-QUALIFIED
This takes a lot of the time sensitive stressors off you, the realtor, and the lender. If you are already pre-qualified, it means you have already gone through all the paperwork needed to give you the exact amount you qualify for. Once you find the home of your dreams, you can close much faster. This helps beat other potential buyers to the punch when offering on a house. Sellers will hear from their realtor that the offering party, you, are pre-qualified so they will not have to fear that your offer will fall through during the process.
DO: CLEAN UP YOUR CREDIT
Credit is a significant factor in your final interest rate. Even if you have great credit, a derogatory mark could affect your rate. That stupid phone bill you don’t owe money on but they say you do, needs to be taken care of. The extra cost of a credit repair company just to get rid of the small things that sometimes find their way onto your report is worth it and will save you money down the road.
DO: GET AN IDEA OF YOUR PAYMENTS
Use a calculator. There are plenty of free ones like Magilla’s Home Calculator. While not exact, getting a rough estimate on your monthly mortgage is a good way to understand how interest works on your home.
DO: UNDERSTAND THE MARKET
More research is necessary. You do not buy a house very often. Knowing how the Fed affects the housing rates is a good thing to know. Looking at the past five years of rates and seeing how they move, at what times of the year they move, and how often they change are all good things to have in your pocket. This will dictate when you start looking for a home so you can get the best rates of the year. If you are aware of the market, you can get in on the lowest rates at the right time.
DON’T: QUIT YOUR JOB
Seems like common sense, right? Many home buyers think that their stated income on the application is the only time they need to be concerned over how much they gross. Then, they are suddenly surprised when a lender declines their application because they, in some way, affected their income, whether by changing jobs or by changing their pay structure. Job stability also matters. Banks like stability so changing jobs at this crucial time could kill your deal in a heartbeat even if the new job has better pay. You better hope you have a rock-solid offer letter demonstrating exactly what you will be getting and a great loan officer. Don’t quit your job. The closing only takes 30-60 days to happen. Wait it out before making the shift. Most people who do need to change their job approach it correctly by telling their lender in the beginning.
DON’T: DECLARE BANKRUPTCY
Bankruptcy is rough. It is a dark time in anyone’s life. It is also a deal killer 99% of the time. If you just filed bankruptcy, don’t even bother trying to apply for a home loan. If you recently discharged your bankruptcy, don’t bother trying yet. Most banks require five years minimum to reestablish credit and to prove you are a good borrower again. Some non-traditional lenders will go as low as three years. Sometimes you have no choice but to file for bankruptcy but other times, people just want to get out from under all the debt. That is a decision you make but know the consequences.
DON’T: TAKE THE WORD OF ONE LENDER
Talk to a couple of lenders. Home purchases have the same general formula but everyone has their own niche of knowledge. By understanding the perspectives of a couple of lenders, you will piece together who is the best person to work with. They all have different strengths and depending on your scenario, you could be hamstringing yourself if you only use the one your realtor refers you to.
DON’T: BUY A BUNCH OF CRAP
Stay off your credit. Any changes puts fear into the lender and directly shrinks how much you qualify for. Making it all the way through the closing process only to have a bill show up on your credit card because you really wanted a moped is not a good way to end your week. You could get declined in the final stretch if you are already cutting it close to your credit limit on the loan amount you are looking for. Wait until closing, then buy what you want.
Getting documentation to your lender so he or she can finalize your rate is often a time sensitive deal. Money is tied up in escrow and there are fees and everything lying around. The last thing you want is a lender sitting around waiting on you to get your docs to him. Rates are locked for a limited amount of time when you start the process. Significant delays, especially not at the fault of the lender, could affect the final rate.
DON’T: OVER BUY
Know the amount you can comfortably afford. If you are buying a house on the upper end of what you can afford, the banks will want to mitigate their risk by upping the rate a little bit. They factor in the statistics of someone who buys a house on the line of their affordability and work in the chances of a default. If your upper limit is $500,000 and you buy a house at $495,000, you will most likely pay a slightly higher interest than if the house cost $400,000. Putting in that pool in the backyard will be cheaper than buying one that already exists because you will be paying less interest for it.
GO FOR GLORY
Now you understand some factors that affect your interest rate. Doing these things will help your overall transaction close smoothly, and hopefully, at a better rate than what you might have gotten. Buying a home is not hard. It is formulaic. Follow the formula and guidance of your lender and the many moving parts will take care of themselves.