You want to get the best interest rate possible, but you don’t have a lot of money to put down on a home. You probably think your only option is to take the higher interest rate. Luckily, there are ways to help you get the low rate you always wanted. Your down payment isn’t the only deciding factor.
While lenders do put some emphasis on your down payment, it’s not the only factor they consider. Try to make some or all of the following happen to get your low interest rate.
Have Great Credit
Lenders look at the big picture when deciding how risky it is to give you a loan. A big part of that picture is your credit score and history. The higher the credit score you have, the lower the interest rate a lender may give you.
Lenders look at your credit score to determine your likelihood to repay your loan. If you have a low credit score, your likelihood of paying the mortgage is low. If you have a high credit score, though, it shows that you are probably financially responsible and are likely to make your payments on time.
A high credit score can offset the risk that a low down payment creates. When a borrower doesn’t have a lot of their own money invested in the home, there’s less reason for the borrower to make their payments. When you factor in a higher credit score though, the chance of default decreases.
Have Stable Employment
Another factor lenders look at is your employment history. While they care about how much money you make, they care even more about your employment history. What they want to know is if you stay at the same job or you change jobs often.
Borrowers that change jobs often pose a higher risk of default. You don’t show that can stay at one job and have stable income. Whether you leave the jobs voluntarily or you are let go, you pose a high risk of default to the lender. What if you don’t find a job to replace the one you left? What if the income isn’t as high at the new job? This puts a lot of questions in the lender’s mind, making them less likely to give you that lower interest rate because of your risky employment history.
Have a Low Debt Ratio
Your debt ratio is an important aspect of your loan profile as well. Your debt ratio lets a lender know how much of your gross monthly income you already pay out for existing debts. The lower your debt ratio, the more likely you are to pay your mortgage. This usually means a lender can give you a lower interest rate because your risk of default is lower.
Each loan program has their own debt ratio requirements, but in general, you can expect the following:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 43% total debt ratio
- VA loans – 43% total debt ratio
- USDA loans – 29% housing ratio and 41% total debt ratio
If your debt ratio is lower than your loan program’s guidelines, you stand to be able to get that lower interest rate that you wanted.
You can lower your debt ratio by paying off debts before you apply for a mortgage. Even if you just pay your credit card balances down, but don’t pay them off completely, it can lower your debt ratio. Your minimum required payments on your credit card bills is what the lender uses to determine your debt ratio.
Pay Mortgage Points
You can always ask the lender about the option to pay mortgage or discount points on the loan. Paying points is like paying the lender interest up front. If you prepay your interest, the lender may be more likely to give you the lower interest rate that you want.
If you know you’ll stay in the home for a long time, this could be beneficial. Of course, you’ll have to see just how much you will save with the lower interest rate. If the amount you’ll save is significant and you can ‘pay off’ the points you pay within a few years of the new loan, then you’ll stand to save money.
There isn’t a set discount a lender must give for each point that you pay. It’s up to lender discretion. It’s up to you to discuss this option with each lender to see how it would change your rate and the total cost of your loan.
Your final option is to shop around. Each lender has their own risk levels and subsequent charges. Some lenders just charge higher interest rates, even for the borrowers with the lowest risk of default. Others are willing to negotiate or charge lower rates right off the bat.
It is possible to secure a low interest rate even if you make a low down payment. The key is to find the right lender and loan program that suits your needs. You can then tailor your qualifying factors to meet the program’s needs.