Economic factors aside, many personal factors affect the par rate, or the interest rate a mortgage lender will give you. Lenders have interest rates they can charge for the “best borrowers,” and they adjust rates for the “riskier borrowers.” Fortunately, you can control your personal factors, which means you can work on getting the best mortgage rate possible. A high credit score means you’re seen as less of a risk to lenders – you pay your bills on time and don’t overextend your credit. When lenders pull your credit, they see you as a responsible borrower with a low risk of mortgage default. This leads lenders to give you a better interest rate – one that’s closer to the advertised rates because they don’t have to adjust for a low credit score. When you have a low credit score, lenders often change the interest rate significantly because you’re at a higher risk of default.Credit Score
Determining what credit score you need to buy a house depends on the loan program. If you want a conventional loan (meaning it won’t be government-backed), you’ll typically need at least a 620 credit score. If you choose FHA or VA financing, you’ll often need a credit score of 580 or higher, though it is possible to qualify in various cases with a lower score.
Taking the steps to check and improve your credit will put you in a better position to get a lower rate from your lender.
Down Payment
Lenders want to know that you’re invested in the home through a down payment and that you aren’t borrowing 100% of the funds. The more money you have invested in the home, the less likely you are to default on your mortgage.
If you put down less than 20% on a home, your mortgage rate may increase and you’ll often need to pay mortgage insurance. There are different types of insurance depending on your loan program; some are eventually cancellable while others are not.
Loan-To-Value Ratio
Lenders also compare your down payment to the loan amount, which is your loan-to-value ratio (LTV). The less money you put down on the home, the higher your LTV becomes, which is a higher risk for the lender.
When you put little money of your own into the home, you have less incentive to keep paying the mortgage when times get tough. If you have your own money invested, you’re more likely to do what’s necessary to pay off debt.
Lenders charge higher interest rates when the risk of default increases, which is the case with low down payments.
For example, if you make a 3% down payment on a $200,000 loan, you put down just $6,000. But if you make a 20% down payment on a $200,000 loan, you put down $40,000. There’s a big difference between losing $6,000 and $40,000. Lenders usually give the borrower with the larger down payment a lower interest rate.
Occupancy
Mortgage lenders care about whether your home is your primary residence, a second home or an investment property. Interest rates are usually lowest on primary residences because it’s where you live. You’re more likely to make your monthly payments on time because you don’t want to lose your home.
If you have a second home or investment property and you have financial issues, you’re more likely to default on the mortgage, putting the lender at risk. Most lenders charge higher mortgage rates to make up for this risk.
