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Trying to figure out what’s going on with mortgage rates can feel like a fool’s errand. Mortgage companies are rarely transparent about closing costs and lender fees, and rates can shift daily—sometimes even hourly. The truth is, there are a variety of reasons a lender will offer you a particular interest rate, but figuring out the details can be confusing.
Here are three key factors that can affect your mortgage interest rate:
1. Your credit score and financial picture
Your credit score and financial picture are probably the most important considerations when it comes to getting a great rate. While underwriting can be stressful for homebuyers, this process is how your mortgage company does their due diligence and determines the risk associated with handing you a very large sum of money to buy a home.
The stronger your credit and overall financial picture, the lower your mortgage rate will be. And this can save you thousands over the life of the loan. So it’s worth it to improve your credit and get your financial ducks in a row before you shop for a home.
Some information that will be reviewed during underwriting:
- Your debt-to-income ratio
- Average of all three credit bureau scores
- Negative items currently on your credit report
- Job history, including: length of time at your current job, breaks in employment, time worked in the same industry, etc.
- If you’re self-employed, prior years tax returns will count as current income. You need to have two years of prior tax returns with sufficient income to qualify
Pro tip: Make sure to gather and organize all your financial documentation prior to applying for a mortgage. It can save you a lot of time and stress in the long run.
2. Details about your home purchase
Lenders look into the nitty gritty details of a property when they underwrite your mortgage and determine your rate. This is one way they minimize risk. Your lender can’t finalize the details of your home loan until they know exactly how much the home is worth, and any potential risks that could come up in the future.
A few factors your lender will consider about the property:
- Home price and condition
- Property type (primary residence, secondary residence, single or multi-family unit, etc.)
- Loan amount
- Down payment amount (remember: the higher your down payment amount, the lower your rate will be)
- Sales contract details, including earnest money down and contingencies
These details can make a big difference when it comes to your rate. So talk to your lender and make sure you understand how the specific property you’re interested in can affect your bottom line.
3. Technical Details About Your Loan (Loan Terms, Points, and Fees)
Another major factor in determining your rate? The technical details, such as:
- Closing costs and lender fees
- Fixed vs. adjustable rate mortgage
- Balloon payments
- Upfront points and fees
- The loan period (AKA how long you have to pay back the mortgage. For example, you’ll pay a different rate for a 30-year vs. a 15-year fixed rate mortgage)
- Type of loan (generally speaking, conventional loans vs. government-backed loans)
As a homebuyer, it’s critical you understand each of these items and ask questions about anything confusing you. A trustworthy lender will take the time to explain each aspect of your loan and your selected rate and will provide you with educational resources to help you navigate the process.
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