The most important thing that people pay attention to when they take out a loan to buy a house is the interest rate, and there are many factors that affect the interest rate.
01 Credit score
Credit scores have the greatest impact on interest rates.
Loans are priced in steps, with each credit score step corresponding to an interest rate. The higher the credit score, the lower the interest rate, which is typically a 20-point step.
Conventional loans are commonly used by most homebuyers, with a minimum score of 660.
The other type of loan is the higher limit Jumbo loan, which requires a higher credit score, a larger down payment, and usually a higher interest rate for the borrower.
For the Jumbo loan, a credit score of 760-780 is the first tier.
While there is a tier difference every 20 points, there is no significant difference as long as the credit score is 700 or higher.
If you have a really high credit score, above 760, the interest rate will be a little lower, but it won't be much different each month.
02 Loan-to-income ratio
The DTI is a ratio that banks use to consider a borrower's ability to make monthly payments.
It is broken down into Front-End DTII and Back-End DTI.
The higher the debt-to-income ratio, the higher the risk of the bank's loan. If it exceeds a certain ratio, the bank may refuse to give you a loan. Most banks currently require that the Front-End DTI not exceed 28% and the Back-End DTI not exceed 43%.
In general, the higher your income and the lower your other loans, the more home purchase loans you can apply for and the more favorable the interest rate will be.
So some lenders will advise you to pay off other large loans before applying for a mortgage, and also not to take out new loans in the short term, such as opening new credit cards, taking out loans to buy furniture and appliances for your new home, etc.
03 Working hours and income level
Generally, lenders will require the lender to have worked for a period of time with a stable income, and two years is the most appropriate time.
The best case scenario is that you have been in the same job for two years before, or have changed jobs midway but to a higher paying job.
However, there are some young buyers who are just starting their career and don't worry. As long as you have an offer letter from your employer, there are still many lenders who can help with the loan.
However, if you are self-employed, lenders will be more careful and strict. They will carefully compare your income and Tax Return.
04 Down payment
If you can prepare a 20% down payment in advance, it will be more advantageous to get a good loan rate.
Because loans are adjusted for risk factors, a 5% down payment will definitely be riskier and have a higher interest rate than a 20% down payment.
Also, if the down payment is less than 20%, the lender will require PMI mortgage insurance.
PMI is affected by the loan amount, credit score, type of home, DTI and loan program.
With a 10% down payment, the annual PMI is roughly 0.4%-0.85%. But by the time the mortgage is paid down to 20%, you won't have to pay it back.
Of course, it is not necessarily bad to put down less than 20%. We also have some investment clients who choose to put down only 5% to 10%.
While it may cost about 100 more per month, the cost of using that money is still low considering the current low interest rates.
The rest of the money can be diversified rather than placed in a house.
Many people believe that we should save 20% before we start thinking about buying a house. Considering the growth rate of home prices in the U.S. in the last two years, saving money will likely not keep up with the growth rate of home prices.
So if you already have the intention of buying a house, you can lower the down payment percentage as soon as you can afford it and choose the right house.
