5 steps to get the best possible mortgage rate
If you're in the market for a home, there are five things you can do right now that will help you qualify for the cheapest possible mortgage. The tantalizing low rates lenders put in their ads are for borrowers with the best credit history, substantial down payments and the biggest gap between how much they earn and how much they owe each month.
Most of us will have to pay more. The only issue is how much more.
Nathan Russo, vice president of Action Mortgage, in Cranston, R.I. explains what happens to those who don't meet the criteria for the lowest rates: "About a month ago, we found a mortgage for someone at 10.5%. He had a low credit score and no down payment." And that was for a five-year, adjustable-rate Mortgage.
"It was either that or 13% for a 30-year fixed," Russo says. "He took the ARM because he could get it at a better rate, and he will either move or refinance within five years." Russo adds that many people, usually first-time buyers, fall into the same category, "but they still want to be homeowners."
Of course, you can't undo the damage a bunch of missed payments have done to your credit report, or save another $20,000, overnight.
But every quarter-point is worth fighting for, so here's what you can do:
- Pay every bill as soon as you get it. More than anything else, lenders want to know that you'll make your payments on time month after month after month. If your credit history shows you've skipped a payment, or just been a few days late with your check to a credit card or utility company, they'll consider you a bigger risk. And bigger risks pay higher rates. But a late check only weeks or even a few months before applying for a mortgage, will be taken particularly seriously.
- Make a larger down payment. Lenders have learned that the more money you put down on a house, the less likely you are to default. So ask if you're near a cutoff point. If adding a few thousand dollars would lower your rate by a quarter-point or more, consider dipping a little further into your savings.
- Pay off as much debt as you can. Lenders look at the total amount you owe and your monthly payments. They want to see that you can afford to make all of your current payments and the new mortgage payment they are about to pile on top of that.
- Buy a house you can truly afford. As a general rule, you should not spend more than about 30% of your income on a house payment. But most lenders will let you stretch that to 40% or maybe even a little more depending on your other debts. But the more you borrow, and closer you come to absolute limit of your ability to keep up with all your payments, the higher your risk and the higher the rate you'll be quoted.
- Shop around. Get realistic quotes from at least three lenders. You can find the banks and finance companies offering the best rates in your area by clicking back a page and using our rate search.
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