It is very important to note, not all mortgage companies offer the same loans. As you have now figured out with requirements, process, and credit, there is no one-size-fits-all loan. Every individual comes into the process with a different financial situation. By identifying where you currently stand, we can help identify the programs that will work best for you.
- This is not something you can Google yourself and become an expert on — there is a lot of conflicting information out there. If you were to Google mortgage programs you will find over 158 million search results. That is a mix of information confusing to everyone, especially if you aren’t very familiar with the mortgage industry. The best course of action to finding the right program is finding the right lender. If you have referrals from a friend or family member, start there. That lender has already helped someone you know and was a trusted partner in their loan process.
- Everybody’s situation is unique. You do not hold the same job, have the same hobbies, buy the same groceries, or drive the same car as your neighbor, best friend, or family member. You may have heard stories from those friends and family members who were turned down for a particular type of loan. That does not mean the same thing will happen to you. You are not the same in your financial habits and will have different qualifications when it comes to being approved for a loan. Only by working through a trusted company with your best interests in mind can you understand the right loan options for your unique situation. So it’s probably best not to listen to your Uncle Joe who bought a house two years ago and now thinks he knows everything about mortgages.
- The mortgage advisor is the expert and can help guide you through the process of your financial situation. You should see by now, that unless you work with mortgages day in and day out, there are variations that can change loan qualifications. Your mortgage advisor is the expert and knows the loan programs inside and out. By working closely with a mortgage advisor you’ll find the right mortgage program that meets your goals for homeownership and long-term plans.
What affects approval and interest rates
Mortgage approval and interest rates are two aspects that have a lot of moving parts. There is no one size fits all answer, because both the approval process and the rates available are very subjective. What might have been a factor in your friend’s mortgage approval or the rates they received might not affect your approval or rates, and vice versa.
The most critical factors in the loan approval process are:
- Your credit score – a high or low credit score doesn’t automatically put you in the approval or disapproval category. However, your score will determine the types of loan products you qualify for and affect the interest rate you can receive. The lower your credit rating, then most likely, the higher the interest rate will be on your loan.
- Your debt-to-income ratio – this is the amount you pay in debts, credit, and other liabilities, compared to your income. The percentage tells your mortgage advisor how much room you have between your usable income and the debts you are currently paying.
- Your downpayment – the higher your down payment amount, the less risk a lender takes on when giving you a loan. You also benefit from potentially getting a better interest rate, and you can avoid Private Mortgage Insurance (PMI). You will also have instant equity in your home. But, it doesn’t mean that you won’t be approved for a mortgage if you can’t come up with the 20% down payment. your mortgage advisor looks at your whole financial picture and fits the right loan product with your circumstances.
- Your job history – your job history is important to signal to lenders that you can pay back the loan. Lenders realize that people have all sorts of jobs from a salaried employee to part-time, self-employed, and freelance/contract work. By providing two years worth of income statements, they can help you get approved for a loan.
- Approval partially depends on your mortgage credit score – As we said above, your mortgage credit score comes into consideration for approval and interest rates. We will go in-depth on what a mortgage vs. consumer credit score is in the section on credit.
After reading the above factors, you may be worried that you won’t be able to qualify for a loan. But keep this in mind: It’s not “if” you can get a mortgage, it is “when”. A good mortgage advisor is like a personal financial advisor. They look over all of your documentation, and ask you questions about your finances, giving them an overall picture of your situation and how you handle money. By having the full picture, they can help you come up with a plan to get you where you need to be financially to be approved for a loan. It might take a year or two to get there, but by following a plan, you can get a mortgage.
How is my mortgage interest rate determined? Some of the factors listed above related to your approval play a role in determining what interest rate you will be able to qualify for. Let’s look at the five additional factors that will determine your interest rate:
- Home location – interest rates vary based on state and county. While this may seem strange, the market for purchasing a home in the midwest is not the same as California or Florida. The CFPB has a tool to estimate what your rates could be in your location. But you will get a more accurate idea by sitting with your mortgage advisor and talking about specific homes you are interested in.
- Loan term – this is the amount of time you have to pay back the loan. Standard mortgage loan terms are 30-year or 15-year, though there are some variations. Generally, shorter loan terms have lower interest rates but higher monthly payments and, of course, lower overall cost due to a shorter time frame.
- Loan type – this is where your mortgage advisor can help you find the best loan to reach your goals. There is a long list of different loan types, and the types you can get often depend on your qualifications or circumstances. For example, veterans of the US military can qualify for a mortgage guaranteed by the United States Department of Veterans Affairs, also known as a VA loan. If you qualify for a specific loan type such as FHA, VA, or USDA, your interest rate could be less than a conventional loan. Your mortgage advisor will help you explore all of your options.
- Interest rate type – mortgages have either a fixed rate or adjustable rate. The fixed-rate loan is set for the lifetime of the loan, it will not change, and so your monthly loan payment will stay the same for the total principal and interest. An adjustable-rate mortgage usually starts out with a low fixed interest rate, but after a period of time, the rate fluctuates with the market. This means an adjustable-rate mortgage usually starts with a lower monthly payment, but you run the risk of that rate rising years down the road.
- Discount points – these “points” are an extra payment you make in advance to the mortgage lender to receive a discount on the overall interest rate. Paying points might be in your favor if you plan to live in your home for an extended time. Your mortgage advisor can help you decide if paying points makes sense for your financial situation.