What we decided to do for this article was to bring an expert so we can ask all of the questions. He is an experienced investor and he’s the CEO of his own business. Angelo Christian is going to help us get the right information to get the best mortgage rates.
Getting a low mortgage rate is very important. Right now, interest rates are really low, but there’s some key things that you have to have in place if you want to get a low mortgage rate.
We are going to share 5 secrets to get the best mortgage rate. The list starts with our credit score.
1. Get your credit score as high as possible.
Ideally, you want to have your middle FICO Score at least 760 or higher. The way that lenders, underwriters, and bankers look at how they price an interest rate is based on your middle credit score. Usually, everybody has three FICO Scores. Their Equifax, their Experian, their TransUnion. What you really want to do is get your credit score at least 760 or higher.
2. Debt-To-Income Ratio.
The debt-to-income ratio that you have is going to determine or could affect your interest rate. If you have a very high debt-to-income ratio, what that means is the amount of income that you have coming in versus the amount of debt that you have going out.
Generally, lenders like to see that your debt-to-income ratio is below 40%. That means after you factor in your new home, and all of your debts and all of your liabilities, that your gross income before taxes is below 40% of all of your debts, all of your outflow.
It’s a simple division, your debt divided by your income, and they want it to be below 40%. If your debt-to-income ratio is higher like 50% or 55%, the lender could hit you with a higher interest rate.
You don’t want to happen because you’re considered a higher risk of going into default if you’re carrying on too much debt. Debt is very important. Lenders don’t like to be around people that have a lot of debt because it looks like a high risk.
3. Credit Inquiry.
A lot of people go online to LendingTree, and they make the mistake of having their credit shotgun all over the place with multiple lenders. If that happens, that can actually hurt your credit and pull down your credit score.
You definitely want to get a rate quote from a few different lenders, talk to a few different lenders, but you don’t want to have your credit pulled, 10, 15 times. Because if your credit is pulled too many times, that can hurt your credit score, pull your credit score down. Then the other thing is that it looks to the lender as if you’re high risk because maybe you got declined for credit. It’s okay to get a few comparative quotes.
4. Cash Reserves or reserves.
Reserves are important. Basically, what reserves refers to liquidity, what is your cash, your assets. Lenders are not so much concerned about tangible assets like, “Well, I have gold”, or, “I have silver. I have baseball cards”, or something like that.
In other words, if somebody is buying a house, to say, a million-dollar home and after closing, they only have one-month reserves. Can you pay six months of mortgage payments after you close in case you lose your job? Can you float the mortgage payment? If the answer is yes, potentially give you a lower interest rate because we have more reserves.
If somebody is like a first-time buyer millennial, and they’re scraping to put the money together and they don’t have a lot of money, sometimes the lender will modify or adjust their interest rate and they could have a slightly higher rate if they don’t have enough reserves.
5. Loan-To-Value Ratio.
What does that mean, loan-to-value ratio? Essentially whatever the purchase price of the home is, how much are you financing? What’s your cash injection? How much capital are you putting into the deal?
If you’re buying a three hundred thousand dollar home and you’re not putting any money down, is that more risk or less risk to the bank? This is something that you have to look at. If you’re putting 20% down, which is the average in America for someone buying a home, you’re going to get a better interest rate than if you put 3% down.
The importance of putting the 20% down
You are not forced to put 20% down. There are government loans where they have subsidized down payments. There’s nothing wrong with those, but if you don’t put 20% down, you will pay mortgage insurance, and mortgage insurance in some cases can be very expensive.
If you want to get a lower rate and you can put 20% down or even more, you’ll have more bargaining power to negotiate to get a lower interest rate. Why? Because if you walk into a bank or a mortgage company and say, “I only have 3% down”, you’re going to be thinking about paying a higher interest rate.
The lenders will base their decision on the quality of the information that you have provided to them. They are going to check your credit, your income, your assets. Talk to you about these different things and basically come up with a game plan, a solution or multiple solutions, on how to help you.
That lender is going to review your file and then come back to you within 48 hours for a credit decision. The average review time is 48 hours. Some people’s cases can take longer and some can be instantaneous. It depends on the file and what they’re doing. What happens after that, after the credit decision comes back, you’re going to get a pre-approval letter from them. It’s going to be from our mortgage company. It’s an official certificate that you’ll get to share with your realtor.
Review of a loan
There’s different levels of review in the home loan process. The pre-underwriting, what they did to pre-approve you, and then there’s the final underwriting. After the loan gets pre-approved, you go under contract. The next step is you’re going to request a loan commitment. This is one of the final stages of loan funding. The loan goes before the underwriter. Just like when you see it on court, you go before a judge, it’s like that. You go before an underwriter. They’re licensed by the bank or licensed by the government agency to make the loan. They review everything with a microscope.
Some loans are different. Some loans, like no documentation loan or asset-based loans, there’s not really the microscopes much bigger, but for most loans, the microscope is very narrow. They check a lot of stuff.
You have to embrace it if you want to get a loan. It’s just part of the process. They’re going to ask you questions, and you have to feel comfortable to answer those questions.
Once you get over that hurdle, it’ll be fast. You’ll actually get a loan commitment. That means you’ve been guaranteed to get the loan. You’ve been blessed and anointed by the underwriter, and now you have a loan commitment guarantee. That means that there’s no more questions and you’re going to close.
Then what happens after that is you’re issued something called a CTC, which means that your loan has been cleared to close. Then your loan will go to docs, which is you’ll go to the final attorney and they’ll prepare the loan documents for you to sign and go to a title company, an escrow company to sign on your documents and close on your loan.
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