Friday, March 1, 2013

MORTGAGE & FINANCE: Four easy ways to get a low mortgage rate

Are you ready and eager to buy your first home, but not sure if you'll qualify for those historically low mortgage interest rates that are splashed across every real estate section?
Well, you are right to be excited, since rates really are extremely low by historical standards. In fact, the average interest rate on a 30-year fixed-rate mortgage was just 3.57 percent as of February 5, 2012 - down from 4.85 percent just two years ago - according to Mortgage News Daily, an organization that provides housing news and analysis.
These low rates, combined with the relatively low prices of homes, make now an attractive time to buy, says Jim Duffy, a mortgage banker with Cole Taylor Mortgage. "It's a great time to buy because it's a perfect storm: rates are at their lowest point ever and housing prices are depressed," he says.
So keep reading to find out what some mortgage experts say about how to take your best shot at a record-low interest rate.

Tip #1: Improve Your Credit

Do you know what your credit score is? You probably should, because for any lender considering you for a mortgage, it's the first thing they're going to check, says Chris L. Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans.
So what does your credit score have to do with your mortgage rate? Basically, the higher your credit score, the more likely you are to get a better interest rate.
FICO scores, which Boulter says is the scale most banks use, run from a low of 300 to a high of 850. At a minimum, Boulter says you'll want a score of at least 720 to 740 to qualify for today's historically low rates.
But don't fret too much if your score isn't quite at the gold standard. Duffy says you can still qualify for a mortgage with a score as low as 620, but you'll likely have to pay up to a half a percent higher on the interest rate.
Wondering how you can improve your credit score in the short term? Duffy says you can get an immediate 10 to 15 point jump in your credit score just by paying your credit cards down to approximately 30 percent of their limit.
For instance, if you have a credit card with a $3,000 limit and a $2,000 balance, your credit score is negatively affected. Paying the balance down to $1,000 might make the difference in qualifying for a mortgage or getting a better rate, he says.

Tip #2: Decrease Your Liabilities

No, we're not saying get rid of your teenager - no matter how attractive that idea may be. We're talking about liabilities that lenders worry about: things like car loan payments, credit card payments, school loans, etc. That's because these liabilities determine your debt-to-income ratio, or how much your total debt is as a percentage of your gross monthly income.
Liabilities impact your ability to qualify for a mortgage because the lenders measure your liabilities against your monthly income to determine how big a mortgage you can afford.
So what should your debt-to-income ratio be to qualify for the lowest mortgage rates? Duffy and Boulter both say that this ratio needs to be 40 percent or lower - and that includes your prospective new mortgage payment - along with property taxes and any private mortgage insurance (PMI).
By decreasing your liabilities and ensuring you have a low debt-to-income ratio, you'll hopefully be putting yourself into a smart financial situation and only borrowing what you can afford.

Tip #3: Put at Least 20 Percent Down

We're not sure if you noticed, but banks aren't exactly risk-takers, at least when it comes to
lending money.
In fact, says Boulter, after the past few years of a challenging economy, mortgage lenders are more wary than ever. So if you want the best interest rates, you'll have to reduce the lender's risk by putting more money into a down payment.
Why does this help? Because your down payment is the "buffer" that keeps your lender from losing money if you default on your loan and they have to sell the house to cover the mortgage. The more money you put down, the bigger the lender's buffer becomes - and the less risk they take on.
So to get the best mortgage rates available, Boulter says a down payment of 20 percent of the property's purchase price is mandatory.

Tip #4: Emphasize Your Job Stability

Are you worried that you won't qualify for a good mortgage interest rate because you've recently changed jobs? Well, as long as you stayed in the same industry, you should be okay, says Duffy.
"A lot of people think, 'Oh no, I just got a new job so I can't get a loan.' But that's not the case. As long as it's the same industry as they've been working in for at least two years, it's not a problem," Duffy says. The same goes if you're self-employed.
Just remember, they have to be two uninterrupted years, says Boulter. Weeks or months of unemployment might "reset" the job history clock. Boulter also points out that lenders will want documented proof: W2s from employers, and tax returns if you're self-employed.
If you have been promoted, received raises, or been with the same company or in the same industry for a long time, make sure you submit documentation of those facts, he says.

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