Your mortgage rate and terms can make a big difference in the total amount you spend on your home. With a lower rate, you could save thousands in interest over the life of the loan. Here are a few tried-and-true ideas that could help you get a lower rate.
Protect and Improve Your Credit Score
Your credit score has a big impact on the interest rate you qualify for. That’s because a good score makes lenders feel more confident that you’ll be able to make your payments, so they feel that it’s less risky for them to lend you money.
Here are some things you can do to improve your credit score:
Pay your bills on time.
Pay down or pay off your credit card balances. If you do carry a balance, make sure it’s no more than 20-30% of your available credit limit.
Check your credit report to see if there are any errors or inaccuracies. You can request a free credit report every 12 months. If you do find mistakes, get them corrected before you apply for a mortgage.
Start Saving
Once you have your emergency fund in place — with at least three months’ worth of expenses — start saving for your down payment. Typical down payments for homes range from 5% to 25% of the purchase price. But in many cases, you could qualify for a lower interest rate if your down payment is 20% or more. If you can afford it, a bigger down payment means that you’ll be borrowing less, and you’ll also have some equity in your home right away. It could also mean that you won’t need to purchase private mortgage insurance.
If a 20% down payment seems out of reach, there are federal programs that may be able to help you if you’re putting less money down — such as those offered by the U.S. Department of Veteran Affairs (VA), the Federal Housing Administration (FHA), and the United States Department of Agriculture (USDA). Each of these types of loans has different eligibility requirements, and your Federal Student loans must be current for you to qualify.
Pay Down Debts to Reduce Your DTI
When you apply for a mortgage, or any large loan, one of the things that lenders look at is your debt-to-income (DTI) ratio. Your DTI ratio is all your monthly debt payments—from student loans to credit cards—divided by your gross monthly income. Lenders use this ratio to determine whether you’ll be able manage all of your existing debts, along with the monthly payments for a new loan.
If you can pay off some of your existing debts and avoid taking on any new debt, that will reduce your DTI ratio. A lower DTI ratio makes you more attractive to lenders, so you’ll be more likely to qualify for a mortgage and you could potentially get a lower rate.
If you have student loans, paying them off as quickly as possible will also reduce your DTI ratio. If you’re looking for a new job, some employers may offer to pay off some of your student loans as an incentive for you to join their company. The Consolidated Appropriations Act, which passed in 2020, allows employers to make tax-exempt contributions of up to $5,250 per year on your student loans through 2025.
If you’re thinking about buying a home and want to find out what type of mortgage and interest rate you could qualify for, call us at 904-777-6000 or 800-445-6289, or visit your nearest VyStar branch. One of our Mortgage Loan Officers will be happy to help you look over the numbers and help you decide what would work best for you.