July 28th, 2011 2:09 PM by Michael and Jill Kohler
Getting the best mortgage rate
When people call a bank or brokerage and ask what’s the best rate available, we’re usually going to need some information to determine that. One key factor that makes shopping for the best mortgage rate so challenging is that many banks rates change twice per day and some more than that. Add the number of banks you’re trying to compare mortgage rates for, and it gets tricky in a hurry.
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Most online mortgage rate quotes are based on the best case scenario, which hardly reflects the average person’s financial situation, especially in today’s economy. There are many important factors that will influence the final interest rate charged. Here is a short list of basics.
Debt to income ratio (Front end)– How much of your monthly income is being spent on the mortgage, taxes and insurance expressed as a percentage. i.e. 28%
Debt to income ratio (Back end) – How much of your monthly income is being spent on the mortgage, taxes and insurance, plus other recurring monthly expenses like credit card payments, car loans, student loans, home equity loans, but not electric, cable, groceries, etc. i.e. 36%
Loan to value ratio- The percentage of the loan amount as compared to the purchase price or appraised value of the property. Typically 80% is a conventional loan standard but there are lower rates available for borrowers who are borrowing less than 60% of the value of the property. Borrowing 95% is generally going to get you a higher rate of interest due to the greater risk to the lender.
Credit Scores- The middle score pulled from a bank or broker from all three major credit reporting agencies. Transunion, Experian, and Equifax. Often these scores will differ from scores you pull yourself from online services. A middle score above 740 will generally see the lowest rates. Remember also that if there is a co-borrower, a lender will use the lower of each applicants middle score.
Job history- Lenders are looking for a stable job history and documentable income. 2 years tax returns, a month’s worth of pay stubs, and 2 years W-2’s or 1099’s is a standard underwriting criteria today.
So those are the biggies. Where it gets confusing is when you mix all those criteria together. For instance, a borrower may have perfect credit and an 800 mid score, tax returns, documentable income, verified employment, which is great. But he may have a higher than normal debt to income ratio and a lender is going to price that added risk into their interest rate. He could pay anywhere from a ¼ to a full point higher depending upon loan term, amount financed, etc. Watch a short video
Best interest rates
Still other considerations that figure into the calculation are: Loan type: Conventional, FHA, Home equity? Is the borrower paying points to lower their rate? Are you escrowing your taxes and insurance with the lender? If not, expect to pay ¼ to a ½ point higher than the lowest market rates, even if you qualify perfectly in every other category. Get your FREE Quote Now!
So as you can see,
is unfortunately not a simple process. Use the rate shopping you do online as a guideline since there are many components to the formula that will affect your rate. Our Net Equity Loans brokerage shops dozens of wholesale banks rates every day and we realize how confusing this can be. Your best best is to speak with a qualified mortgage professional about your borrowing needs. Our mortgage experts will be able to determine how you will qualify and then shop rates and programs for you through many different banks. This approach will save you time, and give you the flexibility of selecting a loan program and terms that are right for you. Rather than winning the rate war, your most important goal should be to be in the right loan program that fits your needs and that you can afford.
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