If you’re a first-time homebuyer knowing the intricacies of home loans takes a lot of research in 2023.
More than likely, the mortgage you accept is not the best one for you – it’s just the one you get. It’s not until later, when the loan is up for renewal, or you’re refinancing for renovations or upgrading to a higher quality property, that you realize the many options and different home loan products available.
The good news is you can not unlearn what you know, and to ensure you get the best home loan, it pays to give yourself plenty of time to do your homework to get the best deal. Most borrowers focus just on the interest rate and aim to get the lowest with no regard to the actual real cost of the loan over its term. Once you realize there is more to accepting a mortgage than the interest rate, you’ll become more driven to get all the information you need before signing on the dotted line of a loan agreement.
Start your research by asking the right questions about loan products so you can factor in the additional costs over and above the interest rate.
- Origination fees that may include fees for the application, underwriting, and processing
- Credit report fee
- Mortgage insurance (if less than 20% deposit)
You may also need to spend money on third parties to get a property valuation report, building inspection, and title search.
As part of the mortgage deal, the lender can contribute to closing costs and the conveyance fee. It’s common to get an average of $6000 as part of the mortgage product. Remember to factor in the lender contribution, and then you can focus on getting the best mortgage interest rate – i.e. the lowest.
The Best Tricks To Getting An Incredible Mortgage Rate
If you’re trying to refinance your home, consider comparing lenders with an aggregator like iSelect in Australia to benefit from the hundreds of refinance home loan options available to them.
Every country has options for your research, too. For example, in America, an online search will present guides on the best mortgage rates available. They could benefit from the hundreds of refinancing home loan options.
High Credit Scores
Mortgage lending has always been based on tiered pricing, and one of the ways to get the most bang for your buck is by having a high credit score. The best mortgage rates are available to borrowers with a credit score of 760 or above, so pay your bills on time to improve your credit score.
A score of 620, the minimum score you need to qualify for a mortgage, will give you a 5% mortgage rate, while a score of 760 or higher will receive a 3.4% rate, a 1.5% difference.
Stable Employment and Income
In the modern gig economy, banks are still strict regarding self-employment income. If you’re self-employed or own a business, you must provide two years’ worth of tax returns to apply for a home loan. They may even ask for proof that your documents are authentic.
However, if you have a stable income from an employer, you’ll ace this part of the application. Since you’re less of a “risk” to them, you’ll also receive the best mortgage rates in this section.
A Big Down Payment
Depending on where you live, you’ll likely be able to pay a 5% down payment. However, that won’t get you the best mortgage rate. If you can shell out 20% towards your down payment, you’ll be seen as less of a risk and awarded a low mortgage rate.
There’s another reason to save for that 20% down payment. When your down payment is less than 20%, you have to pay for private mortgage insurance, which adds to the cost of your loan.
A Low Debt-To-Income (DTI) Ratio
There are two types of DTI ratios. The first is the back-end ratio, which accounts for your monthly debt payments and house debt divided by your gross income. The front-end ratio is your house loan debt specifically. The lower your DTI, the lower the interest rate.
Most banks won’t let you take out a mortgage if you have over a 28% front-end ratio and a 36% back-end ratio. However, you can get away with more if you’re strong in other areas.
Finding the Right Lender
The right lender can make all the difference in your mortgage payments, as banks don’t always offer the best rates. At the same time, your primary bank, or the bank you use for your checking account, may give you a less attractive rate than another. Don’t settle for your bank.
Sometimes a private mortgage lender or broker can give you the best deal based on your credit score and other metrics. Use mortgage tables and home loan comparison sites religiously.
2-4 Months of Cash Reserves
Do you have cash reserves that could be used to pay for your necessities? If not, you should open a bank account and start throwing money into it. Lenders will check how much money you have in reserves to ensure you’d have enough to pay your loan if you lost your job.
The standard cash reserves requirement is two months, but the more you have, the better. Many “high-risk clients” could get a low mortgage rate if they have a lot of cash reserves.