Are you getting the best mortgage for you? Mortgage lenders have minimum qualifying guidelines for getting a mortgage. Most of these guidelines are dictated by the government entities like Fannie Mae, Freddie Mac and FHA. The individual lender may also add its own layer of qualifying guidelines. These guidelines include such qualifying factors such as work history, down payment, minimum credit score, and debt to income ratio. The guidelines differ based on the type of mortgage.
Meeting the minimum guidelines will ensure that you qualify for the loan and determine how much you can receive for a mortgage. Most borrowers will check to see if they qualify and then proceed with shopping for the home. However, is it possible that you can get a better mortgage? Maybe.
One of the biggest determinants of your interest rate is your credit score. Lenders will typically view a lower credit score as a riskier borrower. If you can improve your credit score, you may be able to get a lower interest rate on a conventional loan. Typically, credit scores that exceed 740 will get the best rates. So, if you have an excellent credit score, ask your lender if you can lower the rate. FHA loans do not have this risk-based adjustment so a higher credit score is not as helpful.
Debt to Income Ratio
Your debt to income ratio is also one of the strongest determinants of whether you qualify and how much you can receive. An improvement in your debt to income ratio (lower than the maximum required by the guidelines) can actually increase your purchasing power. You will, however, want to consult with a lender before proceeding with just paying everything off. A good lender will advise you as to which debts will give you the biggest “bang” if you pay them off or whether it will make a difference.
An additional note about debt – unlike in the past, FHA and conventional underwriting guidelines require lenders to factor in student loans that have been deferred. However, the rules differ based on the type of loan so you want to talk to your lender about how your student loan will affect your mortgage qualification. It’s possible a different loan may make a difference.
Down payments also differ based on the different loans. Many potential home owners automatically think of FHA for a low down payment (the FHA down payment is minimum 3.5%). However, you can get a conventional loan for as little as 3%. VA loans actually have zero down payments. Keep in mind that a lower down payment will increase the amount that you are borrowing so your monthly payment will be higher. For many buyers, though, that is an acceptable trade-off. You can use an on-line mortgage calculator to determine the difference in your principal payment if you decide to lower your down payment.
If you decide to make a down payment which is lower than 20%, you will be charged a monthly mortgage insurance payment that will be part of your mortgage. The mortgage insurance protects the mortgage lender against defaults. Mortgage Insurance is called Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for FHA loans. FHA loans will require an upfront 1.75% MIP payment in addition to the on-going monthly payment. This can be paid upfront at closing or folded into the loan. Conventional loans do not have an upfront payment.
The monthly insurance premium can be cancelled on conventional loans once you get to 80% LTV (20% equity position). FHA’s mortgage insurance payment does not cancel but you can refinance when you get to 22% equity (78% LTV). If you qualify for either conventional or FHA, you may want to see if it makes sense to change loan products based on the impact of mortgage insurance payments.
Length of Term
Some borrowers consider a 15-year term vs 30-year as a way of saving on their overall payment. This can be a great option. However, you will be locked into a higher required monthly payment. For some, a better option may be additional principal payments on a 30-year loan. You can pay a little more each month or even use your annual tax refund as an additional principal payment. If you start consistently applying these additional principal payments early in your mortgage, you can significantly reduce the number of years for your mortgage payment. This way also gives you more flexibility in making those payments. Only you can decide what makes sense for you.
Bottom line, stronger qualifying factors on your part gives you more options in terms of your mortgage. Discuss with your lender the different loans available and any options you have for getting a better mortgage. This is a big purchase and you should make sure any questions you have are satisfied. You want to make sure you are getting the best mortgage for you.
One last note – I would definitely recommend talking to your lender before actively visiting homes. For one thing, you cannot submit an offer for most homes without showing ability to pay (either cash in the bank or pre-approval from a lender). Secondly, our current market has a tight amount of homes available in many neighborhoods. You don’t want to lose out on your chosen home because you are not prepared to submit an offer. Finally, you want to make sure that you consider your mortgage options and find out if there are any issues to be addressed before qualifying.