Who Gets The Best Rate For A Mortgage Loan? 

If you’re in the process of looking for a home mortgage loan, you may be wondering why some people seem to get great rates, while others have to settle for higher ones.  Below, we’ve outlines three major factors that will determine what kind of rate you get—read on to find out how to lower yours! 

Lenders Offer the Best Home Mortgage Rates to the Best Borrowers 

(1)  Your Credit Score Is of Paramount Importance. 

Your reputation as a borrower will have a lot to do with the interest rate that you are offered on your home mortgage loan.  Every consumer carries with them, whether they know it or not, a file that contains information on all of their prior and current debt.  The files also contain information on any problems that they may have had in the repayment of that debt.   This file is known as your "credit report" or credit history. 

Your credit history should be thought of as your credit resume.   This is what lenders will look at to determine if they want to lend to you and if so, how much interest they need to charge on the loan.  

If you have a good credit history, which means that you have demonstrated your ability to borrow money and pay it back in a timely manner without any problems, then you are considered a strong mortgage candidate or a low risk borrower.  In this case, lenders will be eager to loan money to you for a home mortgage loan and will offer the lowest possible interest rate in order to secure your business. 

Therefore, in order to increase your chances of getting the lowest possible rate on your home mortgage loan, it is important to build a good, solid credit history before applying for a home mortgage loan.  The three major credit repositories are Experian, Equifax and Transunion.  Generally investors (lenders) use the middle score of the three to establish creditworthiness.  Normally, investors use the lower middle score of a joint application. (husband and wife or two unrelated co-borrowers)  The generally accepted rating that is associated with credit scores is as follows: 

                        Subprime or B, C and D                               Below 620

                        Average                                                          620 to 679

                        Good                                                               680 to 719

                        Excellent                                                         Over 720

                        Qualifies for every program                          Over 739

Now, with risk based credit underwriting, your excellent score will get you the lowest possible rate.  However, if your middle of three scores is 719 or lower, the investors will add "hits" to the pricing of your loan to reflect market risk.  As of March 17, 2008, a score of 680 to 719 will add approximately .25% to your interest rate on conventional loans.  A score of 620 to 679 will add from .375% to 2.0% to your interest rate depending on which 20 point increment your score falls.

(2) Equity in a Property is Essential 

Investors make a direct correlation with the amount of equity in a property to the risk of the loan.  An average score will get an approval on a loan request if the equity is sufficient.  What is considered adequate equity is a Loan To Value of 80% or less.  In conventional lending, property with less that 20% equity requires Mortgage Insurance (MI).   Mortgage Insurance is purchased by the borrower to protect the investor because the equity is less than 20%.  The less the equity, the higher is the mortgage insurance premium and the more the cost to the borrower.   Mortgage insurance can range from a low .3% of the loan amount (i.e. a $100,000 loan with 19% equity would typically cost $25 a month in MI.  A property with 5% equity would typically cost .78%.  MI can be priced at over 1% for property with little or no equity. 

(3)  If You Can't Afford the Payments, You will Pay a Higher Interest Rate. 

In the old days, before computer approval of conventional loans, the ratios never exceeded 40% or 43%.  The ratios we are discussing are called the debt to income (DTI) ratios.  These ratios are computed by dividing the borrower's monthly income into their monthly fixed payments consisting of mortgages, installment, and credit card debt.  A borrower who makes $1000 a month would have a 40% ratio if all of the borrower's monthly payments totaled $400.  Now, with computerized approval, called DU, DO, or LP, if the borrower has very high credit scores, a loan with a DTI of 50% might receive an approval.  Because many very creditworthy borrowers can not show all of their income via a pay stub or tax returns, loans are available where the income is not verified but is "stated." 

Consumers Who Shop Around Get the Best Possible Home Mortgage Rate 

Another way to ensure that you get the best possible interest rate on your home mortgage loan is to shop around for the best rate offer.  America is a democracy with free enterprise and competition.  It is this competition that helps to keep prices down and gives the consumer the power to locate the best possible offer; and a home mortgage loan is no exception.

Record low mortgage rates, as well as the birth of the Internet, which created a global lending marketplace, have led to a lot of competition among mortgage lenders.  Never before has it been so easy for consumers to compare mortgage rates from so many different lenders.  Since the mortgage lenders know that consumers are comparison shopping, they try to offer each consumer the lowest mortgage rate possible. 

Consumers who are flexible with mortgage rate terms can get the best rates 

Finally, another way to get the best possible interest rate on your home mortgage loan is to be flexible with your mortgage terms. 

For example, you might find that you could get a much better fixed rate home mortgage loan if you went with a twenty year term instead of the thirty year mortgage that you were seeking.  Another consumer looking for the best possible home mortgage interest rate might decide to choose an adjustable rate mortgage instead of a fixed rate. 

The important thing is to be flexible when considering home mortgage rate quotes and look for other ways to get the interest rate down.  For example, it might be worthwhile to pay extra points at closing in order to lower the mortgage interest rate.