Pamela Peredo

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Navigating the world of mortgage rates can be a daunting and complicated task. How can a potential homeowner know what a good mortgage rate looks like? What about the best mortgage interest rates?  Mortgage rates are determined by a wide array of factors and it’s not as easy as simply looking at a list of options and choosing one. The process for determining a mortgage rate involves many variables that help determine what a potential homeowner is qualified to receive. When trying to figure out what is a good mortgage rate, ultimately, the answer is one the potential homeowner can afford. 

It’s useful for any potential buyer to do research on what lenders will be on the lookout for so they can work to make themselves a more attractive candidate for a mortgage at a good rate. And it’s also useful to be aware of the current home buying landscape to get a feel for general trends. 

Potential homeowners have a lot to be happy about. Mortgage rates are at nearly historic lows. Despite the fact that they have been creeping up a bit recently, there’s never been a better time for doing research about what is a good mortgage rate.

At the beginning of May, the Federal Reserve that current interest rates will stay the same; it’s likely that mortgage rates will follow suit or possibly even decrease. 

Currently, for a 30-year fixed mortgage, the average interest rate is near 4.20% while a 15-year fixed mortgage averages around 3.64%. These are definitely some of the best mortgage interest rates a potential homeowner could hope for.

But just because they are the current average doesn’t mean that lenders will approve everyone who comes their way with those rates. 

When it comes to figuring out what is a good mortgage rate and then qualifying for it, any potential homeowner will have to meet specific parameters. The mortgage that a potential homeowner qualifies for determines the monthly payments (including interest) they will be responsible for.

If you are a hopeful future homeowner looking to figure out how to maximize the likelihood that you’ll qualify for a good mortgage rate, here are some suggestions and areas of focus that could help. 

Good Mortgage Rates and Credit History 

A potential homeowner’s credit score and history are the most significant determining factors toward determining what is a good mortgage rate. By looking at the credit history of a potential buyer, lenders are able to verify that monthly payments will be made regularly.

Most lenders consider a potential buyer’s FICO credit score. Generally speaking, credit scores should be around 660; anything above 700 is considered good credit. The specific credit score requirements a potential homeowner will have to meet is dependent on the lender and the type of mortgage being taken out. 

But generally speaking, the best mortgage rates are reserved for potential homeowners with a credit score of around 760. The best way to start improving credit scores is to know where you currently stand.

Potential buyers should consider looking into their credit reports from all of the big-time credit-reporting institutions: TransUnion, Equifax, and Experience. Consumers can access one free credit score history from these companies once a year.

Once a potential homeowner knows their own FICO score, they can begin working towards improving it. Confirm that there are no errors like extraneous accounts or fraudulent charges and if there are, dispute them.

That is one of the fastest ways to bump up a credit score. Beyond that, the focus should be on repaying any debt owed, especially anything that has been sent to collections as that has a hugely negative impact on credit score. 

Stay on a regular bill payment schedule as paying bills consistently is another of the best ways to improve credit history. It only takes a few late payments for credit scores to drop and it can last for a year or longer. 

Mortgages for Low Credit Scores? They Exist But With A Catch

What are the options for potential homeowners with credit scores lower than 700? What is a good mortgage rate for lower-income buyers?

what is a good mortgage rate

Many lenders and banks won’t even consider anything lower than 660, let alone as lower than that. But those who have had rocky income or credit histories aren’t completely without hope. 

There are mortgage options for potential homeowners with lower credit scores. Mortgages that are insured by the FHA (Federal Housing Administration) have credit score requirements as low as 500. They can be an ideal solution for lower-income buyers or homebuyer hopefuls with less than stellar credit history.

Keep in mind though that these types of mortgages aren’t necessarily the best and they typically carry the risk of much higher interest rates. 

Lenders want to have confidence that they will be repaid and a high credit score is one of the most revealing factors in that regard. Working to improve your credit score is one of the best strategies to ensure a good mortgage rate. 

How Employment and Income Determine Mortgage Rate 

Another way that lenders are able to determine the ability to repay on a mortgage is by looking at a potential homeowner’s current job and employment history. If a potential homeowner has no current employment, it’s unlikely they will qualify for any type of mortgage at all.

Generally, lenders want to see that a potential homeowner is not only employed but is a salaried employee who has maintained the position for a minimum of two years. 

For potential buyers who are self-employed, it is still possible and necessary to demonstrate to lenders that you can repay regularly with proof that you have a consistent income and that it has remained stable or increased.

The best way to verify this to a lender is to submit IRS and income-tax returns from the past few years. 

This is also the best strategy to take for potential homeowners who are currently employed but who have recent gaps in their employment history. Submitting back taxes can help a lender have more confidence in the potential buyer’s ability to repay their mortgage. 

Employment history plays a huge role in determining what is a good mortgage rate. Be sure to have thorough documentation and that your employer will be able to vouch for you if contacted by a lender. 

Employment and income go hand in hand, so obviously, lenders will be interested in a potential homeowner’s current income. The better the employment history and income, the more likely a buyer is to get a good mortgage and the best mortgage interest rates. 

Debt-to-Income Ratios and How They Impact Mortgages

Another thing lenders will check on to verify whether a potential homeowner will be reliable in making their monthly payments is the debt-to-income (or DTI) ratio.

They will compare any current debt compared to monthly income and any other cash assets a potential homeowner has. The DTI ratio has an impact on what is a good mortgage rate for any given potential buyer.

All of this information helps a lender determine how confident they can that monthly mortgage payments will be made on time. The higher the lender’s confidence in the potential homeowner’s ability to repay, the more likely it is to result in better mortgage and interest rates.

Do not attempt to apply for a mortgage that far exceeds monthly income; in the unlikely scenario that it is approved, the new homeowners may find themselves in a situation where they’ve bitten off more than they can actually chew. 

Because the DTI ratio has such an influence on what is a good mortgage rate, typically lenders will require monthly mortgage payments to be around 28% of the homeowner’s gross income for the month. The entirety of a potential homeowners’ household debt should not exceed 36% of the monthly gross income. Household debt includes home insurance, property taxes, and other mortgage payments like private insurance. 

If a potential homeowner has a DTI that exceeds that requirement, it is possible to get a better mortgage rate by simply applying for a slightly smaller loan. Potential homeowners with high DTI ratios should attempt to make a concerted effort to pay off extraneous debts to work toward a debt-to-income ratio that will inspire more confidence in lenders in their ability to repay on their mortgage. 

It’s a good tactic to avoid opening up any new credit card accounts or taking on some new loans while in the process of applying for a mortgage. Any time a consumer applies for a credit card, the credit card issuer looks into their FICO credit history which can have a negative impact on the overall score.

It’s best to avoid anything that will cause credit scores to take a hit while trying to get a good, low rate with the best mortgage interest rates. 

Are There Specific Lenders Known for Good Mortgage Rates?

The short answer: no. There are no specific lenders who are always going to offer good, low mortgage rates, typically because each potential homeowner’s financial situation is so vastly different.

The market wouldn’t be able to function properly if lenders determined what is a good mortgage rate and then offered that same low rate to every buyer. 

However, different types of lenders will often offer different types of loans for different types of potential homeowners. This means that lenders often are able to offer very competitive rates or extremely expensive ones, depending on the circumstances. 

Potential homeowners should consider applying their mortgage loan requests to all the lenders they are interested in at the same time, preferably on the same day. This enables the potential buyer to do thorough comparisons of every offer received, making it much easier to figure out what is a good mortgage rate for them. 

The good news is that you can increase your chances of getting a very low rate by supplying your request to multiple lenders on the same day. This will give you a side-by-side comparison of all the offers, and choose the best one.

The Best Mortgage Rate is an Affordable One

Homeownership is a huge, multi-year (often multi-decade!) commitment. It can be overwhelming to try to figure out what is a good mortgage rate and how to work toward making oneself an attractive potential homeowner to lenders. Ultimately, the best mortgage rate is the mortgage rate a potential buyer is able to afford with their current income, debt, and credit history. 

Trying to chase after what is a good mortgage rate is a less useful than forming a solid financial improvement plan. There are concrete steps a hopeful future homeowner can take to ensure that they get an affordable monthly mortgage that will not strain their current financial situation or cause them to default on mortgage repayments. Taking ownership and control of one’s debt and credit history is the first step toward happy homeownership! 

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