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One of the first things you want to do as a first-time homebuyer is to find the best mortgage interest rate possible. Unfortunately, finding the best rate is not as easy as going into your local bank and saying “give me a mortgage with a low-interest rate.” Finding a low-interest mortgage takes time, and it involves several factors such as a good credit score, low debt-to-income ratios and making a large down payment. With that said, it is not impossible to find a low rate if you know what to do before you apply for a mortgage. Here are some tips to help you get started.
Check and Fix Your Credit
The best mortgages with the lowest rates and terms are set aside for consumers with good credit. If your score falls in the right range, then you will qualify for the lowest interest rates by mortgage lenders. A good credit score ranges from 670 to 739, and most banks consider you a low-to-moderate risk borrower. If you have good credit, you will most likely qualify for a low rate.
Since your credit score is vital to qualifying for a low-interest rate, you should pull a copy of your credit report from one of the three major credit agencies in the U.S.: Transunion, Experian and Equifax. It is helpful to get your score before you start applying for a mortgage. Once you know your score going in, it can give you more leverage while you are comparing rates on different mortgages offered by lenders.
Paying Down Your Debt
Your debt-to-income ratio, which is the amount of money you owe in relation to your gross income, also plays a critical role in qualifying for a low rate. Many lenders will charge you more in fees and interest if your mortgage payment is more than 28 percent of your gross income. Additionally, all your combined debt should not exceed more than 36 percent of your gross income if you want the lowest interest rate possible.
Before you apply for a mortgage, calculate your debt-to-income ratio. If you are paying more than 36 percent of your gross income on all your debt, you should pay down some of your debt to qualify for the lowest interest rates. If possible, pay down as many of your revolving credit accounts as you can.
Big Down Payments
Almost every mortgage lender will give you a lower interest rate if you make a down payment of 20 percent or more. A bigger down payment gives lenders a little more protection in the event you default on your mortgage. As an added bonus, a bigger down payment almost guarantees you will not need to pay for private mortgage insurance. In some cases, depending on your credit score, lenders will offer a low rate if you can make a 10 percent down payment.
Other tips that will help you score a low rate include shopping around for a mortgage, exploring different loan options and learning more about a mortgage refinance. There is no rule that stipulates you must accept the first offer given to you from the first bank your visit. Remember, all banks and mortgage lenders offer different interest rates, so it can really pay off if you shop around.