Everyday, numerous people will make a decision to purchase a home or refinance a mortgage. This is when advertised mortgage rates take on a new meaning and the numbers given directly affect the dollars in your wallet. But how exactly is your rate determined? It’s time to find out.
Once you have applied for a mortgage, you’ll learn there’s a loan process that must be followed by your lender to determine whether they’re willing to help finance your home. These same factors are going to have an impact on the mortgage rate you’re offered. In the end, a higher risk will mean a higher mortgage rate and a higher cost. A lower risk means a lower rate and savings for you.
What Factors Affect My Mortgage Rate?
1. Credit Scores
Your credit scores are calculated based on your credit history, the amount of debt you carry, and how it’s managed. Your lender will consider both your credit history and scores when processing a mortgage and evaluating the risk. Many lenders get your credit scores from three different credit reporting agencies and use the middle score of the three to help determine what mortgage rate will be offered. Borrowers with the highest credit scores are typically offered the lowest mortgage rates.
2. Debt to Income Ratio
The debt to income ratio (DTI) is a calculation of your total debts in comparison to your total income, both prior to a mortgage and with a mortgage. Mortgage programs have maximum debt to income ratios that are acceptable. Lenders may also add their own restrictions, called overlays, which can further reduce the debt to income maximum for a particular mortgage program. Keeping your debts as low as possible prior to applying for a mortgage will help with your debt-to-income (DTI) ratio and the mortgage rate offered.
3. Loan to Value
The loan to value (LTV) of a mortgage is the calculation of the loan against the value of the property that’s either being purchased or refinanced. It’s the appraisal of the property that provides the loan to value for your lender. Different mortgage programs require a different loan to value. With a high LTV, the borrower must have a larger down payment depending on the type of mortgage. Any LTV above 80% will also require you to pay mortgage insurance and a higher mortgage rate.
Lenders use rates sheets when quoting a mortgage rate to a borrower. These rate sheets have adjustments for each of these separate factors listed above. Each adjustment adds a certain percentage to the initial advertised mortgage rate. So, keeping credit scores high, DTI low and LTV below 80% will help provide the lowest mortgage rate available.
A ditech Home Loan Specialist can assist you with your loan application and provide you with a mortgage rate quote. Find a Home Loan Specialist now.