Buying a home has always had its challenges, but it is expected that some homeowner friendly tax deductions disappeared when the tax law took effect. This will mean that for many Americans, it may not be as good financially to own a home. Yes, home mortgage rates are rising, but there are still attractive interest rates for home loans if you know where to look. This underscores the importance of qualifying for a home loan with a good mortgage rate will be so important in 2024 and beyond.
How to Qualify for a Mortgage with the Best Interest Rate for Home Buying
There are many factors that affect your mortgage rate: credit score, down payment, type of loan you choose, whether you get a government backed or conventional mortgage, and more. It will always pay to shop around with several lenders to see who can give you the best rate.
Here are some tips to qualify for a home loan with a good rate:
Improve Your Credit Score to Get the Best Mortgage Rate
Your credit score tells lenders how financially responsible you are. The higher your score, the generally lower rate you will get on your mortgage. While raising your credit score can take awhile, it is definitely worth doing.
For example, if you got a $300,000 home loan in 2017 when rates were lower, you could pay as little as $1370 per month if you had a credit score above 760, and a rate of only around 3.7%. But if your credit score was only 620, you would be paying more than $1600 per month with a rate of over 5%. And that would be if you could even qualify for the mortgage at that credit score.
Raising your credit score involves paying all of your bills on time, including utilities and credit cards. Also, you can really help to raise your score by reducing your credit card debt. This is one of the fastest ways to increase your score. If you can pay off $5,000 of credit card debt, you will find your score will be raised by 30 or 40 points. This is a big bump that can score you a lower home loan rate.
Keep in mind that your credit score serves as an indicator to lenders of your likelihood to repay borrowed funds promptly and in full. Consequently, individuals with lower credit scores are often perceived as higher-risk borrowers, prompting lenders to offer interest rates at the upper end of their scale. Conversely, when seeking a home loan with a higher credit score, you are viewed as a less risky borrower, likely to meet repayment obligations on time. This perception allows lenders to extend loans with lower interest rates, making borrowing more cost-effective for you.
Put More Money Down to Maximize the Lowest Mortgage Rate
The next best way to get a lower home loan rate is to put down as much money as you can on the home. Putting down at least 20% down on your home will get you the lowest possible rate on a conventional loan if you have a high credit score.
For example, if you put down $40,000 down on a $200,000 home, which is 20%, you would have paid $730 per month only with a rate of 4% in 2017 with a high credit score. But if you only put down $25,000 or 12%, you would be paying $823 per month. Plus, you need to pay mortgage insurance when you put down less than 20%. So, putting at least 20% down can really save you money. Compare 15 and 30 Year Mortgage Rates.
Think About How Long You Will Be in the House
If you want to get a lower interest rate, you may want to think about an adjustable rate mortgage. Adjustable rate mortgages or ARMs are available in 3, 5, 7 and 10 year increments and they come with lower rates for those periods than a 30 year fixed mortgage. An ARM can be a smart way to save big on interest, but it really is only best for people who are going to sell their home before the introductory rate expires. The 3 and 5-Year ARM loans are the most popular adjustable rate mortgages this year.
Do you think you will move in three or five years? Then an ARM may be the way to go. But if you plan to stay put for many years, you may want to think about a 15 year mortgage. This shorter term mortgage has a lower interest rate, but of course you will have a higher payment. Not everyone can afford to do this.
Shop Around for Competitive Home Loan Options
It is very important to check with several lenders to see what the best rate is you can get. Different lenders will have different rates for very similar programs. Do not just go to one lender and get one quote. Check home mortgages, refinancing and 2nd mortgage loans with a bank, credit union and mortgage broker online. There could be a significant difference with the rates they offer.
Find Attractive Home Loans and Rates from Top-Ranked Mortgage Lenders Online.
Consider a Government Backed Mortgage with a Great Fixed Rate
If you don’t have the best credit, a good option is an FHA home mortgage. This government backed mortgage comes with a very low interest rate that is usually below market rates. Last year, it was possible to get an FHA loan with a 5.9% rate, but in 2023, rates are higher. Still, they are usually lower than conventional rates.
You will have to pay mortgage insurance, but FHA loans can still save you money if you do not have a high credit score. The other option is finding a private lender that offers home loans for bad credit scores. The interest rate on these loans will be significantly higher,
As interest rates on mortgages see an upward trend, applicants stand to potentially save thousands by securing loans with higher credit scores and exploring various lenders for the most favorable rates before finalizing agreements. It’s worth noting that refinancing remains an option in the future, offering the prospect of securing an even lower rate when interest rates eventually decrease.
Remember that mortgage brokers operate in a competitive environment, yet they typically have no obligation to present the most advantageous deal to borrowers. Investing the time to explore various options is highly beneficial. Engaging in thorough research and shopping around for the best interest rate can result in substantial savings, potentially amounting to tens of thousands of dollars throughout the duration of a loan. Keep these tips in mind if you want to qualify for a home loan with the lowest possible rate.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
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