In general, mortgage rates are strongly determined by economic factors influencing the market. However, economical issues can make mortgage rates go down since a bad scenario is forecasted. While a good forecast can make these rates go up because there is more demand. Even though mortgage rates are strongly affected by external forces, there are still some tips to help you get one of the best offers.
According to FICO’s statistics, better rates are provided to borrowers with higher credit scores (740+). But this is just one factor impacting your mortgage rate. Your risk is calculated upon many different factors, such as age, job stability, the value of your collateral (in case of a secured loan), and credit utilization. These are the most important factors lenders look at when evaluating mortgage rates.
Another factor that affects mortgage rates is the Federal Reserve. By implementing policies, stimulating the economy, or tightening the money supply, the Fed is indirectly affecting mortgage rates one way or another.
Contrary to the belief, the factors listed below do not affect your mortgage rate. According to Joe Parson, these 4 factors are not looked up when closing a loan.
- Debt-to-income ratio (DTI). It may be surprising, but lenders are willing to authorize loans with a 50% debt-to-income ratio (or lower). However, there’s no improvement in mortgage rates for a lower DTI.
- 740+ credit score. Based on the table below, it is observed that there is no rate reduction for above 740 credit score.
- Liquid assets. Liquid reserves are not required or looked at when authorizing a mortgage loan.
- A larger down payment will affect your pricing only minimally. adjustments for a 740-score applicant alter just slightly as the loan to value ratio rises. In fact, the LLPA is lower for loans under 97 percent that are greater than 80 percent. This is because mortgage insurance covers a portion of the lender’s risk when a loan exceeds 80% of the home’s value.
While FHA loans can help people with less than stellar credit scores buy a house, you still need to consider your down payment, loan limits, and make sure you compare more than two FHA-approved lenders.
There are a few other options for regular credit, but you need to take into consideration what the broker’s commission will be, down payment, and some hidden fees.
Most lenders use the same kinds of pricing adjustments based on the loan type, credit score, and loan to value ratio. These adjustments are called loan level pricing adjustments (LLPAs) and are part of their risk-based pricing.
Based on a loan to value ratio and credit scores, loan-level pricing adjustments (LLPA) look like this:
In order to reduce your pricing adjustments, your credit must be slightly improved. Looking at the table, by simply improving your score by 5 points, your adjustment can be significantly improved. Therefore, having a fair credit score is key to having a better mortgage rate.