Buying a home is likely one of the largest purchases you will make during your lifetime. And it’s a purchase you’ll be paying for long after you close the deal.
If you plan on buying a house, save yourself a lot of money by securing the best mortgage rate possible. Follow these tips to get a low rate on your mortgage and find the best mortgage lender.
Clean Up Your Credit Report
The best mortgages are reserved for borrowers with credit scores higher than 760, according to Consumer Reports. Before you apply for a mortgage, pull your credit report so you can make sure all the information on it is accurate — otherwise, you could be allowing an error from a credit bureau to cost you more in interest.
Avoid applying for new credit for at least a year prior to applying for your mortgage. Each time you apply for new credit, the inquiry is added to your credit report and can affect your credit score for one year, according to Experian.
Pay Down Your Debt
Besides high credit scores, lenders also like to see borrowers who have a low debt-to-income ratio. In general, lenders want your mortgage payment to be 28 percent of your monthly gross income. The rest of your household debt — which includes your mortgage, property taxes, private mortgage insurance and home insurance — shouldn’t be more than 36 percent of your gross income. Try to pay down your revolving credit accounts as well because you can be a more attractive borrow if your credit-to-debt ratio is 30 percent of your income or lower, according to Experian.
Consider Different Loan Options
Banks offer different types of mortgages, so make sure you research them all. Check out your options for a fixed-rate mortgage and an adjustable-rate mortgage.
If you’re not sure you’re moving into your “forever” home, consider an ARM that doesn’t start adjusting its rate for several years. For example, if you use a 7/1 ARM, the interest rate won’t change for the first seven years, so if you move or refinance in year six, you’ll never see that rate change.
Shop Around for a Lender
Even if you have existing accounts at a particular bank, don’t just apply at that bank. Instead, research options from multiple mortgage lenders so that you can do a mortgage rate comparison and find the best lender for you.
When you’re looking at different mortgage options, the interest rate is important, but you should also consider your closing costs and other fees. Even if you prefer using a brick-and-mortar bank, you could use some online mortgage quotes as leverage with another lender.
If you’re worried about affecting your credit score with a bunch of mortgage applications, don’t. If a lender uses the old FICO scoring model, you can apply for multiple mortgages within 14 days and your credit score will reflect only one of the inquiries; if the lender uses the newest FICO model, you’ll have 45 “shopping days” for multiple applications.
Save for a Larger Down Payment
Try put down at least 20 percent on your home. Banks reward larger down payments with lower interest rates because if you default on the loan, the bank is better protected against a decline in the home’s value. In addition, a 20 percent down payment enables you to avoid paying for private mortgage insurance, lowering your costs even more.