Getting the Best Available Interest Rate For Conventional Loans

When clients are looking to buy a home, one of their biggest concerns are what interest rate they will receive. However, many people aren’t exactly sure what goes into determining their interest rate for their mortgage. While there are several factors that increase or decrease one’s interest rate, the biggest factor is the market itself. Many clients typically ask, “How are the interest rates these days?” or something along those lines. Different buyers tend to receive different interest rate but ultimately, most buyers of different financial situations will tend to be within 0.5%-1.0% of each other. So the question is, how can you be the buyer that is receiving the interest rate that is 0.5%-1.0% better than other buyers?

Credit Score

In order to put yourself in the best case scenario to receive the lowest interest rate available, you want to have the highest credit score possible. A mortgage term that goes into determining your interest rate is what are called hits. For every hit, or negative item you receive, your interest rate will go up. If you have a high credit score, you will either receive a small hit or no hit at all. As your credit score lowers, the hit will become much larger, increasing your interest rate. Generally speaking, a credit score of 720 or above will keep your hit small so you are still eligible of receiving the most competitive interest rates.

Down Payment Size

In a conventional loan program, most buyers will make a down payment of 3%-20%, depending on how much money they have saved up and want to bring to the closing. Of course, a borrower is always eligible to put a higher percentage of the loan amount down, but that is less common. Although only making a 3% down payment may seem desirable for a conventional HomeReady loan program, keep in mind that the smaller down payment might mean a larger hit, causing the interest rate to be slightly higher. In order to reduce that hit, putting 5% down will reduce that hit and keep you in contention for getting that interest rate as low as possible. Depending on the lender you make your mortgage payments to, it can be beneficial to make a larger down payment of over 5%. However, it is not always the case you that you will receive a smaller hit if you increase the size of your down payment. The best thing to do is to speak with your lender or broker to show you which is your best option.

Loan Amount

Lastly, the larger loan amount you take out, the smaller the hit you will receive, keeping your interest rate lower. For example, a person who needs a loan amount to cover a $90,000 mortgage will most likely have a higher hit than a person taking a loan of $220,000. Since many lenders have different requirements and items that cause hits, this is not always accurate for all lenders. To find the hit amount, look up the lenders rate sheet to show the interest rate you will receive. Another important item to note is that most hits come in range brackets, meaning increasing your loan amount by $5000 or your credit score by 10 points won’t always reduce the hit. A lender might give a hit of 0.1 to a loan amount between $100,000-$200,000 and a hit of 0.05 to a loan amount between $200,000-$300,000. The same principal is applied to credit scores. If you are someone who is taking out a smaller loan amount or only putting the minimum amount down, don't worry, usually these hits are miner. Having an excellent credit score is the most important thing.