Following these nine steps can make a huge difference in the cost of your mortgage.
- Mortgage rates have repeatedly hit record highs during the pandemic.
- Rates are now much higher – over 5.00% for a 30-year fixed rate loan, on average.
- Homebuyers will need to shop around more carefully and take more steps, like paying off debt and organizing paperwork, to get an affordable loan.
In the midst of the pandemic, qualifying for an affordable loan was easy enough for most homebuyers. Rates repeatedly hit record highs and it was possible to get a 30 year fixed rate mortgage for less than 3.00% if you had reasonable financial credentials.
Things have changed, however. Rates have increased significantly and now exceed 5.00% on average for the popular 30-year loan option. This obviously made borrowing much more expensive.
That doesn’t mean future homeowners should give up on getting a reasonably priced mortgage, though. Although no one will get a rate close to 3.00% anymore, it is possible to get the cheapest loan possible in today’s market by following these nine key steps.
1. Improve your credit score
Credit is one of the most important things lenders look at when setting your rate. If you can improve your credit score, you will become a much more competitive borrower. A score above 720 to 740 can help you get the best rates available at the time you borrow.
Improving your credit score can be done by reducing the amount of your available credit used, becoming an authorized user on someone’s credit card with a strong credit history, or asking your lenders to remove intentionally negative information if you’ve generally been a good customer who pays on time, but you have a mistake or two in your past.
2. Pay off your debt
Paying off your debt helps improve your credit score, which can help you get an affordable loan. It also improves another key metric that lenders look at: your debt-to-income ratio. It’s the ratio of debt to what you earn. The lower it is (which means the less debt you have), the more competitive your rate will be because you will be perceived as a less risky borrower.
3. Set a budget
You will want to budget realistically for how much you can afford to borrow. This will help you qualify for a more competitive loan since you reduce the risk to a lender by only borrowing what you can easily afford to repay. If you can borrow less, your mortgage will also be more affordable than if you had taken out a bigger loan, even if you can’t get the lower interest rate.
4. Organize your documents
Lenders are going to ask for a lot of paperwork, and it’s best to have it ready so you can act quickly with approval before rates go up even more. You should expect to provide tax returns, payslips, bank statements, and other proof of assets.
5. Decide which type of loan is right for you
There are many types of mortgage loans. A 15-year loan is an alternative to a 30-year loan, for example. It will come with a lower rate, but higher monthly payments because you’ve shortened the time to pay off your loan in full. Think carefully about the different tenure lengths to make the best choice for your needs.
6. Get multiple quotes from lenders
Since loan rates and terms vary by lender, you don’t just want to get the first loan someone is willing to give you. You should get multiple quotes for your mortgage from at least three different mortgage lenders, and ideally more. Online lenders, local and national banks, and credit unions are all worth looking into.
7. Get pre-approved
Once you’ve found an affordable loan, get pre-approved. This means submitting all of your financial details and getting an approval, provided you find an eligible home and don’t make big changes to your financial situation.
When you get pre-approved, you usually have the option to lock in at the current rate being offered to you at that time. This can help you avoid any rate hikes that may occur over the next few months.
8. Shop for the perfect home
You’ll want to make sure you find a home that your lender will allow you to borrow to buy. Specifically, look for a home that is priced within your budget and reasonably priced given market conditions. Lenders require an appraisal, and if a professional appraiser says the home isn’t worth as much as you’re offering, it could create problems getting final mortgage approval.
9. Avoid mistakes before closing
Finally, you want to make sure you don’t do anything that could jeopardize your mortgage before closing. Avoid changing jobs or borrowing more money, two red flags that could worry a lender.
By following these nine steps, you should hopefully be able to get a mortgage you’re happy with, even if rates are higher than they were a short time ago.
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Mortgage rates are at their highest level in years and should continue to rise. It’s more important than ever to check your rates with multiple lenders to get the best possible rate while minimizing fees. Even a small difference in your rate could reduce your monthly payment by hundreds.
This is where Better Mortgage comes in.
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