- Posted by: steve
- Category: mortgage rates
Advertised mortgage rates vs. actual mortgage rates can sometimes be very different. Here’s a handy guide on getting the advertised rates.
The first thing you see when shopping around for a mortgage is the absolute best rates you could possibly qualify for in big, bold letters.
These lenders know what they’re doing. They want to draw you in with the lowest interest rate and down payment possible in order to get you to go through the application process.
However, people tend to be surprised at the interest rate they ultimately end up qualifying for. Most times it’s higher than anything you saw while searching around the lender’s website.
The best possible rate for a 30-year fixed-rate mortgage fell to 3.86 percent recently, the lowest it’s been since last November. For a 15-year fixed mortgage, the rate hovers around 3.16 percent.
According to these numbers, it’s a great time to buy. So why are you not qualifying for them?
To find out, we first need to delve into the variety of factors that go into qualifying you for a certain mortgage rate.
Your FICO credit score is one of the biggest factors in determining your mortgage rate. Essentially, your credit score is an account of your history in paying off your loans in a timely manner.
A mortgage company looks at this score as a sort of percentage of likelihood that you will ultimately pay back your mortgage within the time they have established for you.
Determining what your credit score is an important first step in the process of shopping around for mortgages. Getting a copy of your credit report is free and easy, so make sure you have yours before doing anything else.
FICO scores typically range from 300 to 850. The higher the score, the better credit you possess.
While there is no real cut-off for what qualifies you as a “prime” or “subprime” borrower, you generally want to keep your credit score at 700 or above for the best interest rates possible.
If your score is hovering at 600 or below, it might be more prudent for you to concentrate on raising that number before applying for a mortgage.
There are a number of ways you can raise your score. The fastest is to reduce the amount of debt you currently carry as much as possible.
However, every mortgage lender is different. Just because you have a credit score of 750, or even 800, doesn’t necessarily mean you are elevated as a borrower in the eyes of a mortgage company.
If you have an excellent credit score and are still not qualifying for those vaunted low rates, you might have to look elsewhere for an explanation.
Debt To Income Ratio
Your credit score really only determines how adept you are at making payments on your debts in a timely fashion. It doesn’t factor in how much debt you actually have.
This is a big concern for mortgage companies. You may be in a good position to pay your monthly car payment as things currently stand. But how well equipped will you be to make that payment once you will also have to make a monthly mortgage payment as well.
This is where your debt to income ratio comes in. Mortgage companies have a fairly simple formula to determine this.
In order to calculate your debt to income ratio, you need to determine the total amount of your monthly debt divided by your gross monthly income.
For this calculation, monthly debt is determined as debt you will be paying on a monthly basis for at least a full year.
Your gross monthly income is essentially considered to be the amount of money you earn every month before factoring in taxes.
For example, let’s say you pay $300 a month toward your car payment, $200 for insurance, and $1500 for your current rent. In this case, your total monthly debt would come out to $2000 a month.
If your monthly income is $8,000, your debt to income ration would come out to 25 percent because $2000 is 25 percent of $8000.
This is a very good debt to income ratio in the eyes of a mortgage company. Especially is your monthly mortgage payments will not exceed the $1500 you’re currently paying in rent.
However, if your debt to income ratio is much higher than 25 percent your mortgage rate may suffer.
If your debt to income ratio is hovering around 43 percent, it might be prudent to work on minimizing your debts before trying to qualify for a mortgage.
When it comes to your employment history, make sure you have documentation to back up any and all of your claims. If you claim to earn $100,000 a year, you need to prove this claim with tax records.
Many times, someone will have a variety of assets that contribute to their net worth that exists outside of your normal income. In the past, you could just list these assets but since the crash, mortgage companies want you to fully document them with pay stubs and tax records.
Most importantly, you need to prove that you have had consistent employment for at least the past two years. This can be proven with pay stubs or a letter from your employer.
The two-year number is important. Most mortgage companies require you to be continuously employed for the past two years in order for you to qualify for a fair rate.
The longer you can prove you have been employed for, the better a rate you will be qualified for.
It’s also helpful to show that you have been with the same employer for a long period of time. If you have jumped around too much between employers, mortgage companies may be wary about your ability to remain consistently employed throughout the tenure of your mortgage agreement.
Down Payment on Your Mortgage
Generally, the more money you are able to put down up front toward your mortgage, the lower your interest rates will be.
The ability to put down a sizable down payment is an encouraging sign to many mortgage lenders. It means that you at least have enough disposable income to start your payments ahead of the game.
A sizable down payment also helps you out in the long run. The more money you are able to put toward your debt up front means the amount of time you will spend paying back your loan.
The down payment is also not subject to the interest rates of your overall mortgage loan. Because it is not money you have initially borrowed from a lender, they won’t charge you extra.
One of the best ways to qualify for a lower interest rate and to save yourself money on the back end of the loan, in the long run, is to start off with as big a down payment as you can afford.
However, one thing to keep in mind is that the interest you pay on your mortgage is tax deductible. The money you put toward the principle is not.
So depending on how much you want to save on your taxes, putting a hefty amount of your money toward the principle is not always the smartest choice.
It all depends on your particular situation.
Review Your Own Standing
If you find yourself on the borderline of many of the above-mentioned requirements, you may have found your answer to why you are not qualifying for those advertised rates.
If enough lenders are telling you that you’re not the ideal borrower they’re looking for, it might be wise to review your own financial standing.
A mortgage is a huge amount of debt to carry if you are not 100 percent sure you can consistently make your payments and pay the interest.
You can use mortgage calculators or speak with a specialist about how viable it would be for you to buy a home in your current financial state. There’s no harm in holding off for another year or two to save more money or to pay off any lingering debt.
Then, once you have found yourself in a better position to qualify for the lowest possible mortgage rates, you’ll be ready to re-enter the market.
If you have met or exceeded all the above-mentioned requirements, you still may not be getting offered those vaunted, advertised mortgage rates. This is where we get into the underlying reasons that may be more hinged on your specific circumstance.
One of these explanations could be the location you are looking to buy a home in.
A lot of times you will see the advertised mortgage rates on a national lender’s website. This means that these rates are often either the national average or the lowest possible rates offered in the cheapest areas to buy.
If you are buying in a particularly hot market, say California or Florida, you might lose out on the lowest possible rates.
From the lender’s perspective, it’s not enough that you are a highly qualified buyer if you are searching in a hot market. They know that there are plenty of people lining up to purchase a loan from them in that area.
It’s sometimes worth the risk to lose out on your business by only offering a higher rate than what you would typically see elsewhere. They can make it up by charging someone that same high-interest rate because they know someone will eventually pay it if they’re desperate enough to own a home in these hot markets.
This is why it’s always important to feel out a market before going forward with the first couple interest rates you are offered. Keep shopping around until you feel like someone is offering you a fair rate given your qualifications.
An easy way to tell if you’re being offered a fair rate for the area code you are looking to buy in is to use a free, custom mortgage rate quote.
If you’re finding it hard to find a mortgage company willing to offer you their low, advertised rates, it might be prudent to wait out buying a home till the market in that area cools down a bit.
The Size Of Your Loan
Another reason why a mortgage company might not find it in their best interest to offer you the lowest mortgage rate is because the loan you are asking for is too small.
This happens often when you’re in the market for refinancing your mortgage with a lower interest rate. If you have already paid off more than one-third of the loan, a mortgage company might not deem it worth it to offer you their lowest interest rate.
Some lenders will even have a minimum loan amount, where they have determined giving out a loan of that size would not be profitable for them.
Make sure the reason you are not qualifying for the best interest rates is not the size of your loan. If it is, look elsewhere for a lender that specializes in giving fair rates for smaller sized mortgage loans.
Attaining Those Advertised Mortgage Rates
The first thing you should do is review your standing as a qualified candidate for a mortgage loan. How good is your credit score? How much debt do you carry? How much steady income will you be able to rely on in the years to come?
If you find yourself in excellent standing, then don’t settle for anything but the best interest rates.
Each mortgage company is different, and each has their own set of unique standards. But there is enough competition out there in the marketplace that you will be able to find someone who will offer you the mortgage rates that you deserve.
The most important step in this entire process is the commitment to shop around. See what’s out there and figure out which mortgage is right for you.