Career Advice - A Community Blog

Erik Larson writes about the job market, resume improvement, and career advice

Tips for Finding the Best Rates on A New Mortgage

Written by Erik Larson, Community Blogger | Dec 13, 2017 4:51 PM

All mortgages are different. You might be so excited to start the homebuying process, but there are several steps you must take prior to looking at any homes. It's not wise to start shopping for a new home without first speaking to a bank and obtaining a pre-approval letter from a lender. Before you do that, however, you must know what you can do to get the best rate possible for your mortgage. Your home is the most expensive thing you'll likely ever buy, and it's necessary to ensure you're getting the best possible rate to keep costs down. 

Check Your Credit

You might make every payment on time, you have no debt, and you've never made any mistakes with your credit. You make good money; you don't submit credit inquiries every time a sales clerk tells you there's a 15 percent discount available on your $30 purchase if you fill out a card application and receive an approval. You have no credit card debt, and you've never missed a payment. 

However, your credit score could still be low because someone else made a mistake somewhere. The credit bureau mixes up one number in your social and now you have someone else's negative credit history listed under your number. Your name is the same name as someone who took out tens of thousands of dollars in loans and credit cards and never paid back a dime, and now their mistakes are mistakenly listed on your report. 

Mistakes happen, and you must be sure they did not happen to you. Each of the major credit bureaus offers consumers one free credit report per year. Take advantage of that by requesting your report from one of the bureaus every few months to keep up with your score and the information on your report. Dispute anything that's incorrect, and get your score fixed before you shop for a loan

Change Your Debt-to-Income Ratio 

Lenders offer the best rates to consumers who have low DTI. This means you must not spend too much of your income on debt. There is no magic number, but most lenders want to see your DTI at less than 36 percent. To do this math, calculate the minimum payment due on all your bills each month and compare it to what you bring in. If it's less than 36 percent of your income to pay your bills each month, you're looking good. The lower the DTI score is, the better your rates will be when lenders offer. 

Get A Down Payment 

If you want the best rates, you need to have a down payment. It is true there are many lenders out there willing to work with people who have no down payment, but that's not typically a good way to start out the home buying process. For one, you will pay Private Mortgage Insurance (PMI) on your loan if you owe more than 80 percent of the value of your home. This means you're looking at paying hundreds upon hundreds of dollars in addition to your mortgage payment each month until you low less than 80 percent on your home. 

Ideally, you want to put down at least 20 percent of the purchase price to avoid PMI. If you can put down more, you can save even more on the total cost of your loan. The less money you owe simply means the less interest you're paying on the life of your loan. If you don't have a down payment, consider waiting a little longer until you have one to begin the buying process. 

Shop Around 

Now that you've got your finances in order, it's time to shop around for a mortgage. Don't stick with one lender and not look at others. Sometimes the best rates are offered by other lenders than the bank you have a personal relationship with, and it pays to shop around for significant savings. For example, you might be a doctor looking for a specific loan from Doctor Loan USA or a family who doesn't make much money looking for assistance for the USDA, and you need to find those lenders. Find the best rates at various lenders and then apply for pre-approval with the lender who has the most to offer. 

Finding an affordable mortgage rate means shopping around, but it also requires you get your own financial life in order. Know what you need before you go into the process. This means figuring what you can afford, what you want, and how comfortable you are paying for a home. Do what feels right, and don't assume you can really afford what the bank tells you is in your budget.

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