May 24th, 2010 2:01 PM by Robin Bain
How to qualify for the best mortgage rates you hear advertised.
Shelby Bateson - Mortgage and Housing Examiner
Whether you are buying a house, an investment property, or refinancing a current mortgage, there is a long list of variables that determine what rates you will pay. In addition to considering rates, there are still many types of loans available, each with their own eligibility criteria, that can affect your rates, including:
Conforming/Conventional: Conforming loans are those that follow Fannie Mae/Freddie Mac lending guidelines, because approximately 87% of all conforming mortgages are still sold to Fannie or Freddie. Typically conventional loans have a maximum loan amount of 417,000, regardless of where you live in the country.
Jumbo: Jumbo loans are those with loan amounts/balances above $417,000High balance conforming: for 2009, the loan amounts that are considered “conforming” have been increased, pursuant to the American Recovery and Reinvestment Act. In areas where the average home prices are higher than Fannie/Freddie conforming limits, “High balance conforming” loans are now eligible for special rates, substantially lower than Jumbo loan rates, but a bit higher than conforming loan rates. Click here to determine the maximum loan amounts in your area to qualify for High balance conforming loans.
Government (FHA, VA, and USDA rural): These are loans that are insured by government entities, such as HUD, VA, and USDA.
ARM (adjustable rate mortgages): These are loans that start at lower rates than conforming, and your rate is locked for a specified period of time before the rate can adjust higher or lower (depending on the index your loan is tied to, and the margin, which never changes.
A few lenders are offering other loan types, but for the sake of this article, we will consider only the above.
Regardless of the type of financing you are seeking, there are other criteria that CAN affect the rate you will pay on your loan, including:
Credit score: When you apply for a mortgage, almost all lenders will require what is called a “Tri-merge” credit report which pulls your credit history from all three of the major credit bureaus. Most lenders will use the “mid score” to determine your rate eligibility (because all three credit bureaus have different formulas for determining your score, so expect each score to be different, and because not all creditors report to all three bureaus.)
Your credit score is the number one factor in determining the rate and types of financing available to you, so your credit history is critical. Currently most lenders require scores of 740 or better to qualify for the best advertised rates, but this is very dependent on the type of financing you want. For example, VA FHA 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, including, but not necessarily limited to:
LTV (loan to value ratio): how much down payment can you make, compared to your purchase price? For a refinance transaction, how much is your house worth compared to the loan you are requesting? The lower the LTV - to a point - the better the rate will be.
Debt ratio - how much do you owe other creditors relative to your monthly income? Lenders look at two debt ratios, the ratio of the new mortgage payment (including taxes, insurance, HOA payments, and any other recurring debts associated with your mortgage payment) to your gross monthly income, AND the ratio of all your debts, including the new mortgage payment, relative to your gross monthly income.Different loan programs have different debt ratio limits, but in general, most programs are looking for ratios close to 38/45 (38 is your mortgage payment to income, 45 is the ratio of all debt to income.)
Type of property: a house, condo, condotel, manufactured house, land, etc. If you are buying a manufactured home, for instance, you should expect to pay higher rates, and because not all lenders are doing manufactured home loans, your choices will be more limited. Looking for financing on a condhotel? You may be limited to financing by the builder, the development, or private money.
Occupancy: Will you live in this house, is it a second home or an investment? How many other investment properties do you own? How long is your history as a landlord?
Lock period: How long do we need to lock this loan? Can the loan close in 30 days or less? Often, this depends on you getting all the required paperwork to your lender quickly. But some of this is out of your control. Before a loan can close, an appraisal is required. This can take up to 3 weeks from the date it is ordered until it is received. Also, as this market has become so volatile, some lenders are offering rate incentives for very short locks of 7 -12 days, so many people are opting to wait to lock the loan until after final lender approval has been received.
Employment history: Most lenders want to see at least 2 years at the same job, or at least in the same line of work.
Type of Loan: Refinance or Purchase: If you are refinancing your house, is this to get a better rate and term, or do you need cash out? Cash out loans usually have an upward adjustment to rate, especially if the Loan to Value is higher than 70%.
Location: Rates differ from state to state AND can also be affected by being in an area designated as "declining value?" Most areas of the country are still as "declining value." This primarily affects how much you can borrow, relative to the value (LTV), but could also affect the rate.
Loan Amount: Believe it or not, most lenders charge a higher rate for loan amounts under $100,000.
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. Mortgage brokers work with big banks, but also work with smaller, less well known, and sometimes local lenders. Because these smaller lenders do not advertise, they can sometimes offer lower rates.
Mortgage rates are very volatile right now. Some lenders adjust rates several times a day based on the most current market rates. Other lenders might change rates only once a week. So, it is very important to shop for mortgage rates before you settle on a lender.
Questions and comments are always welcome.
Premiere Mortgage Services Inc.