Many factors that go into determining your mortgage rate. A lender won’t give you an accurate estimate until you apply for a mortgage and have a credit inquiry performed. From there, a Loan Estimate will be provided that breaks down all of the fees and your interest rate. The following factors will determine your rate and fees:
Credit Score
The higher your credit score, the better your interest rate. You may be able to qualify for a mortgage with a credit score under 700, but you’ll pay a premium for the loan.
To get the lowest mortgage rate, you’ll want a credit score of 740 or higher. Building your credit score can take some time, but it can make homeownership much more affordable in the long run.
Loan-to-Value Ratio (LTV)
A loan-to-value ratio takes into account the size of your down payment or how much equity you have in your home if you’re refinancing. This figure is an important consideration for lenders. In the eyes of the lender, the lower the LTV, the more the borrower is invested in property, and the better the chances of loan approval and competitive rate.
An LTV of 80% or less will help you secure the best mortgage rate and allow you to avoid paying private mortgage insurance (PMI) on conventional loans. So if your home, or future home, is worth $200,000, a 20% downpayment of $40,000 will give you an LTV of 80%.
Debt-to-Income Ratio (DTI)
How much debt you have will limit the amount you can borrow and impact your mortgage interest rate. Because your mortgage is paid monthly, lenders typically look at your monthly debt payments and calculate it as a percentage of your income. This is known as your debt-to-income ratio, or DTI.
The maximum allowable DTI varies by loan type and can be as high as 50%. But the maximum DTI you’re allowed to have isn’t necessarily ideal. You want to make sure you’re purchasing a home you can afford, and as your DTI increases, your mortgage rate can move up right along with it. A good DTI target is 36% or less, including your future mortgage payment.
Income
Proof of stable and consistent income is an important factor a lender will take into consideration when approving a low rate offer. Certain types of employment, such as self-employed or commission-based pay, could factor into a loan approval and rate offer. In the eyes of the lender, some borrowers are a riskier investment and may want the borrower to pay more for that risk.