Adopting these nine steps can make a huge difference in how expensive your mortgage is.
- Mortgage lending rates repeatedly hit historic lows during the pandemic.
- Rates are now much higher, averaging over 5.00% for a 30-year fixed-rate loan.
- Homebuyers will need to shop around more carefully and take more steps, such as paying off debt and organizing paperwork, to secure an affordable loan.
During the heart of the pandemic, qualifying for an affordable loan was easy enough for most homebuyers. Rates repeatedly hit historic lows 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 risen and are now averaging over 5.00% for the popular 30-year loan option. This obviously made the loan much more expensive.
That doesn’t mean would-be homeowners should forgo getting a reasonably priced mortgage, though. While no one will get a rate close to 3.00% anymore, it is possible to get the cheapest possible loan 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 the rate. If you can improve your credit score, you will become a much more competitive borrower. A score above 720-740 can help you get the best rates available at the time of the loan.
You can improve your credit score by reducing the amount of your available credit used, by becoming an authorized user on the credit card of someone who has a solid credit history, or by asking your lenders to voluntarily remove negative information if you typically are 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 debt helps you improve your credit score, which can help you get an affordable loan. It also improves another key metric that lenders take into account: the debt-to-income ratio. This is 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 seen as a less risky borrower.
3. Establish a budget
We recommend that you set a realistic budget for how much you can afford to borrow. This will help you qualify for a more competitive loan as you reduce the risk for a lender by only borrowing what you can easily afford to repay. If you can borrow less, your mortgage will also be cheaper than if you took out a larger loan, even if you can’t get a minimum interest rate.
4. Organize your paperwork
Lenders will ask for a lot of paperwork, and it’s best to have it ready so that you can quickly proceed with the approval before rates increase further. You should expect to provide tax returns, pay slips, bank statements, and other evidence of activity.
5. Decide which type of loan is right for you
There are many different types of mortgages. 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 have reduced the timeframe for the full repayment of the loan. Think carefully about the different durations to make the best choice for your needs.
6. Get more quotes from the lender
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 on your mortgage from at least three different mortgage lenders and, ideally, more. Online lenders, local and national banks and credit unions are worth a look.
7. Get pre-approval
Once you’ve found an affordable loan, get pre-approved. This means submitting all your financial details and getting approved, provided you find a suitable home and don’t make any major changes to your financial situation.
When you receive pre-approval, you usually have the option to block the current rate that is offered to you at that time. This can help you avoid rate hikes that may occur in the coming months.
8. Shop around for the perfect home
We recommend that you make sure you find a home that your lender will allow you to borrow to buy. In particular, look for a house that is priced within your budget and that is reasonably priced given market conditions. Lenders require an appraisal, and if a professional appraiser says the home isn’t worth as much as you offered, this could create problems in getting final approval on a mortgage loan.
9. Avoid mistakes before closing
Finally, you want to make sure you don’t do anything to jeopardize your mortgage before closing. Avoid changing jobs or borrowing more money, both of which could be warning signs that a lender might worry.
By following these nine steps, you should be able to get a mortgage that you are happy with even if the rates are higher than they were recently.
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Mortgage rates are at their highest level in recent years and should continue to rise. It is more important than ever to check rates with multiple lenders to ensure the best possible rate while minimizing fees. Even a small difference in your fee could shave you hundreds of dollars on your monthly payment.
This is where Better Mortgage comes in.
You can get pre-approved in just 3 minutes, without a physical credit check, and freeze your rate at any time. Another plus? They do not charge origination or loan fees (which can be up to 2% of the loan amount for some lenders).
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