1. Improve Your Credit Score
Your credit score is one of the most important things lenders look at when determining the rate and terms of your mortgage. If your score isn’t where you need it to be, it’s time to start focusing on ways to improve it.
Banks use your FICO score to help determine their risk. The lower your score, the higher your interest rate and the less favorable your terms will likely be. Thankfully, there are some things you can do to improve your score, and it’s best to get your score as high as possible before you apply.
One way to boost your score is to stop using your credit cards immediately. Lenders want to see that you’re a responsible borrower and a good steward of your money. If you can, start paying more than your monthly minimum or try to pay off as many cards as you can altogether.
Something called the AZEO method can be highly effective when it comes to boosting your score. This method, also known as “All Zero Except One” means that the balance on your credit cards should all be $0 except for one. The card with the balance should be small in comparison to your available credit, and you should try to pay it in full each month.
Another way to improve your credit score is to check your free annual credit report and look for any errors. Contact the three credit reporting bureaus immediately if you spot anything wrong so they can correct and update your report.
Avoid applying for any new forms of credit while getting a mortgage. Buying a new car or financing appliances for your new home can derail the entire process. The key is to pay your current debts on time (and more than the minimums when possible), avoid applying for new credit, and keep your balances low.
2. Have a Stable and Steady Employment and Income History
If you need to know how to get a low mortgage payment, your employment and income matter. The lender will want to see that you’re not just gainfully employed, but that you’ve been working in the same industry for a decent amount of time.
The longer you’ve had the same job, the more favorable you’ll appear in the eyes of the lender. They will also want to see that your income has remained steady or increased over the last several years. Most lenders require you to be at the same job for a minimum of two years.
Obviously, you need to have income in order to pay your mortgage. The more stable that income is, the better the odds are that you’ll get a decent rate and be approved.
Lenders will need to verify your employment either via a direct phone call or email to your employer. They’ll also want to see your most recent paystub, your W2 form, and your most recent tax return in some cases.
Make sure you have all of this information readily available when you apply for a mortgage. The sooner you can provide all of the necessary paperwork, the faster the underwriter can make a decision and you can close on the loan.
If you’re self-employed, you’ll need to provide more documentation including a profit and loss report and two years’ worth of business income tax returns. Be prepared to answer questions regarding your self-employment income. If you have your information organized, it’s still possible to use this as income for your new mortgage.
3. Low Debt-to-Income Ratio = Better Rates
When it comes to lower payments, a low debt-to-income ratio is absolutely crucial for your new mortgage. Lenders will look at two different ratios: the back-end and the front-end.
The back-end ratio looks at all of your current monthly minimum payments for any debt you have and combines it with your proposed new mortgage payment. This total is then divided by your monthly gross income.
The front-end ratio looks at your housing costs minus any other debts. For the front-end ratio, only your “real debt” such as student loans, car payments, and credit cards are used. Lenders won’t take things like utilities or the cost of living for food and clothing into account.
Thresholds for debt-to-income ratios can vary depending on the current economic climate and the type of mortgage program you choose. You should try to keep your front-end ratio at or below 28% and your back-end ratio at or below 36% to get the best, lowest mortgage payment.
If you want to know how to get a low mortgage payment, keep your DTI as low as possible. Paying off loans and credit cards will boost your score and improve your debt-to-income ratio.
Some lenders are flexible when it comes to your DTI as long as your application is strong in other areas. For example, if your FICO is in the high range or you have a good income, they may allow some “play” in the debt-to-income ratio calculation.
4. How to Get a Low Mortgage Payment: Consider an ARM
Mortgages will either be offered as a fixed or adjustable rate. With a fixed-rate mortgage, you’ll be locked into an interest rate that will not change over time. This consistency can make it easier to pay your mortgage since the rate plays a big factor in what you’ll pay each month.
However, an adjustable-rate mortgage or ARM can change and adjust over time. The benefit of this type of mortgage is that they usually start off with an introductory period of around three to 10 years where the rate is steady.
If you need to “get your foot in the door” and buy a home, an ARM can be a great way to do it. Some loan programs even offer lower rates for the introductory period of an ARM than you’d get with a fixed-rate loan.
It’s important to note that once your introductory period ends, your mortgage rate could be higher or lower depending on market conditions at that time. Whenever possible, you should refinance your mortgage into a fixed-rate loan before the introductory period ends. You don’t want to risk the rate skyrocketing which can make your payments unaffordable if you’re not prepared.
5. Save For a High Down Payment
After the housing market crisis of 2008, many lenders required a minimum down payment of 20-percent for borrowers. Thankfully, those requirements have been reduced over the years and you can find most programs offering loans at 3 to 3.5-percent down in some cases.
While a low down payment gives you more cash flow, a high down payment will likely make your monthly payments a lot lower. The more money you put down on a home, the lower your total loan cost will be and many lenders offer better rates to borrowers with higher down payments.
Another key point about making a down payment of 20-percent or more is that you can avoid paying PMI, or Private Mortgage Insurance. This monthly cost is factored into your mortgage and is required of all buyers who put less than 20-percent down on their home.
If you choose a conventional loan, you can get rid of PMI once your home has 20-percent equity or more. However, most government-backed loans like FHA require you to pay PMI for the life of the loan, regardless of how much equity you gain.
To save money on your monthly payment, try to save up as much cash as you can for the down payment. Just make sure you also factor in other expenses like closing costs and moving.
6. Get a Rate Lock
Mortgage rates follow market trends, which means they can swing wildly over time. It’s important to watch the current rates so you can see where they’re currently trending. The lower the rate, the lower your payment will be if you can secure it when your loan closes.
If you really want to save on your mortgage payment, it’s a good idea to find out if you qualify for a rate lock. This process will cost you an extra fee, but you’ll be able to guarantee that your rate is “locked-in” for a pre-set period of time. Most lenders offer 30 to 45-day rate locks, and they may extend it to 120 days for an extra cost.
When you lock in your rate, you’ll have peace of mind knowing that your mortgage payment is going to be lower. Keep in mind that you cannot get a lower rate later if rates go down unless you participate in what’s known as a “float-down.” The float-down method is similar to a lock, but you’ll get the lower rate when you close.
Keep in mind that when you choose a rate lock, the rates could go down even more and you’ll lose out on the savings. On the other hand, if markets are volatile, you could end up getting an excellent rate on your mortgage before they start to skyrocket.
Mortgages, just like any other form of financing, come with inherent risks. The rate of your mortgage and locking it in is just one risk that you take if you opt to use this method. If rates seem to be steady, it’s never a bad idea to lock, just so you have some peace of mind.
7. Shop Lenders for the Best Rate and Terms
When you’re shopping for a new car, you probably don’t settle on the first dealership’s offer you encounter. The same applies to your mortgage, and you’re fully entitled to shop several lenders before you commit.
Before you start to shop lenders, make sure your credit score looks good and that you’re confident in your financial situation. Never start shopping for mortgages until you are fully ready and committed to taking the plunge.
Check local banks and credit unions to find out what kind of rates and loan programs they offer. You can also do some online shopping through major lenders and online-only mortgage lenders.
If you’re shopping for lenders online, make sure that they offer loans in your state. Do a side-by-side comparison of each lender and look at a variety of factors before you make a decision.
Some of the things you should consider when shopping lenders include:
- Their current rates for 30-year mortgages
- Any extra fees or offers to lock in your rate
- Does the lender offer conventional, FHA, VA, or other loans?
- What is their average time from application to close?
- The lender’s required down payment and minimum credit score for applicants
- Ease of communication (are they easy to reach by email or phone?)
When you shop lenders, keep a running list of the providers that will be able to give you the best terms possible. Use this list to get pre-approved and then follow up with the lender of your choice so you can get ready to enjoy your new home.
Save Money with Lower Rates
As you can see, there are several factors that can help you with how to get a low mortgage payment and better rates. From locking your rate to keeping your credit score in check, you should be able to find a loan with the best terms and the lowest payment possible.