Do you qualify for the best mortgage rates?

home application paperworkWhether buying a house, an investment property, or refinancing a current mortgage, there is a long list of variables that determines the rate you will pay.

Type of financing

Conforming/Conventional: Loans that follow Fannie Mae/Freddie Mac lending guidelines; approximately 87% of all mortgages with balances under $417,000 are still sold to Fannie or Freddie.

Jumbo: Loan amounts above $417,000.

Government: Loans that are insured by government entities, such as HUD, VA, and USDA.

ARM: (adjustable rate mortgages) Loans that start at lower rates than conforming, with rate locked for a specified period of time before it can adjust higher or lower (depending on the index the loan is tied to). Initial rates are usually considerably lower than 30 year fixed rate loans, but can adjust much higher once the initial locked in period ends.

Criteria that will affect the actual loan rate includes:

Credit score: Mortgage lenders pull “tri-merge” credit reports – scores and details from all 3 major credit bureaus. Most lenders will use the middle score as the basis for determining your rate. When multiple borrowers, lenders will use the lower credit scores.

Currently most conforming lenders require scores of 720 – 740 or better to qualify for the best advertised rates. Government insured loans are not nearly as rate sensitive as Fannie/Freddie loans.

Credit history: Lenders are looking for a number of factors on your credit history that can affect the rate you will pay. Obviously most derogatory information, such as bankruptcies, judgments, foreclosures, etc will affect your score, but this information will also affect whether or not you even qualify for a mortgage at any given time.

Amount of down payment: Conventional lenders usually charge higher rates for those with less than 20% down payments. This is known as “risk based” pricing adjustments.

Debt ratio: There are 2 debt ratios used in mortgage lending.

1. Total loan obligations (PITI – principal, interest, taxes, insurance) divided by gross income = lower debt ratio. (also include HOAs and mortgage insurance where applicable)

2. PITI plus all other monthly debts (car loans, credit card montly payments, etc) divided by gross income is the higher debt ratio considered to qualify for a mortgage.

Type of property: a house, condo, condotel, manufactured house, land, etc. Lenders often charge higher rates for some types of property based on risk and life expectancy of property.

Occupancy: Will this property be owner occupied? a second home? a rental? Do you own other rentals? Length of history as a landlord?

Type of Loan: 30 year fixed, ARM (adjustable rate loan), 15 year loan.

Location: Rates can differ from state to state and from lender to lender, so it pays to shop around a bit. Yes, all banks will pull your credit which will result in about a 6 point drop in your score, but you are permitted to shop several lenders within a 90 day period with only one 6 point adjustment to your rate.

And if all the above information isn’t enough, if you are shopping for a mortgage, it is also important to work with someone with offices close to the property you want to finance. A lender in Arkansas, for example, may not have Oregon rates available, and may not know about any special loan programs or financing specials running in your area of interest.

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