Mortgage rates are at a historic low right now, which means mortgage lenders’ phone lines are ringing off the hook. Everybody wants to borrow money for as little as possible. It’s resulted in some unexpected changes for the real estate market. In some areas, homes are selling for far more than they’re appraising. When money is cheap, buyers are willing to go a little higher in their offers. Some places receive several backup offers within days of being listed. Meanwhile, individuals who already have homes and want to refinance are finding themselves in a tough market. Mortgage companies are being a bit stricter about their guidelines for refinancing, given the COVID-19 pandemic and the inconsistencies it’s causing in the income of some households.
Whether you’re refinancing a home or buying a home, it’s important to remember that when deciding whether or not to approve you, mortgage companies are looking at a few things. But there is one big bottom-line number that ultimately influences their call: your monthly payment. They want to see that you’ll be able to afford those monthly payments, and they’re only comfortable with your payments coming out to a certain percentage of your income (it typically hovers around 50 percent maximum). If numbers are tight, there are some things you can do to lower those payments so you qualify. Read on to learn what they are.
Get the place appraised
Mortgage lenders are concerned with the loan-to-value ratio. Essentially, that’s about how much your place is worth versus how much money you’ll be borrowing. They’re most comfortable with lower loan-to-value ratios. So, for example, if you’re refinancing a place that appraised at 550K and your loan is for 500K, that loan-to-value figure is pretty high. You’re borrowing nearly all the money required to buy the place. If that ratio gets high, it could mean you pay a higher rate – it’s how the lender protects themselves against loss. But, if you are refinancing, your home may have increased in value since you bought it. Having it appraised could show that your place is worth more than you thought, which results in a better loan-to-value ratio, and potentially a better rate.
Improve your credit score
Your credit score is one of the biggest driving factors of the rate you’ll pay. Lenders decide on rates based on certain tiers of credit scores. They don’t look exactly like this but, a common breakdown includes those with a credit score of 740 and above getting the best possible rate, those with a score in the mid 600s up to 740 getting the next best rate, and so on. You can get a sense of the breakdown here. Improving your credit score is a free thing you can do to improve the rate a lender gives you. So if you can afford to pay down credit card debts, or a family member can add you to a credit card with a high limit and low usage, you might improve your credit.
Buy down the rate
This will require some cash, so it’s not a good choice for those looking for free ways to lower their rate. However, if you do have the cash to spare, the overall savings can be well worth it. The exact price of points may vary, but spending between $2,000 and $4,000 might mean a rate drop of nearly a full percentage. Over the course of a 30-year mortgage, that can save you tens of thousands of dollars – over 100K in some cases.
Get a cosigner
It’s important to remember that mortgage companies are just trying to protect themselves. They want to make sure that whether or not you can make your mortgage payments they will get paid. One way they can feel more secure is if you take on a cosigner who has substantial assets or a much higher credit score or income than your own. If you can help assure the lender against loss through this move, you might receive a lower rate. But you’ll need to find someone willing to take on this risk for you.
Lenders are looking at every part of your finances – they’re looking at a full package to determine your ability to pay off this loan. They’ll be most concerned with a monthly income that you’ll show through pay stubs, 1099s, tax returns, and W-2s. But they’ll also be interested to know if you have substantial savings. If you are struggling to qualify, don’t forget to let lenders know about all of your assets. If you have any retirement accounts, brokerage accounts, or treasury accounts, they should know about it.
It’s easy to feel, as the borrower, that you need to prove yourself to the lender. And while that’s part of it, it’s a two-way street. They need to be worthy of your business, just as you need to be worthy of theirs. Feel free to speak to many lenders. Remember that when shopping for a home loan you can have several hard pulls on your credit in a 45-day window and only have it count as one ding towards your credit. Take advantage of that. Call around. Let one place know what another has to offer, and you may see a price drop.
Agree to a longer mortgage
Many lenders will wave extremely low rates in front of you for shorter mortgages. Fifteen-year and 20-year fixed-rate mortgages are getting better rates than 30-year ones. But why is that? Because the lender is guaranteed to get their money back sooner, which they like. That also means that your monthly payments will be higher, and based on your monthly income, you may not qualify. A lower rate always sounds like a lower payment – and, overall, it does mean you’ll pay less for the loan. But since you’re paying it off in a shorter time, the monthly payments are higher. Run the numbers with different lengths of loans to see what makes sense for you.
Wait for the New Year
If it’s the end of the year, know that a lot can change when the year turns over. If you have your own business or work freelance, know that most lenders calculate your income by averaging your last two years of tax returns. Today, a lender would look at 2019’s and 2018’s tax returns. Come January 1 (or whenever you complete your taxes), you can show 2019’s and 2020’s. If you had a great year, that could improve your income on paper for the lender, which could improve your debt-to-income ratio, and might make them comfortable giving you a loan. If you got married this year and will be filing taxes jointly, some of your partner’s assets and information could also play a role in your mortgage application.
Get the right people on the mortgage
If you’re married or buying a home with someone else, it seems like the obvious move to have both of you on the mortgage application. But that isn’t always necessarily the case. If one partner has a bad credit score, that brings down the overall score of the application, which negatively impacts the rate. If one person already owns another home, is in a lawsuit, or is in bankruptcy, that individual should likely not be on the application.
Put more down/buy the loan down
This is another move that will require more cash upfront now, but could mean paying much less over time. The less money you’re borrowing, the lower your payments will be. Regardless of the rate you get, your monthly payment will be smaller if that rate applies to a smaller amount. In some cases, putting down an extra 10K today to buy the loan amount down could be just what it takes to make the monthly numbers work, in the eyes of the lender.