The coronavirus pandemic has made a huge dent in the US economy, but mortgage interest rates are at an all-time low. So it’s no surprise that in 2020, sales of existing homes hit their highest level since 2006, according to the National Association of Real Estate Agents.
That said, due to the economic downturn, many mortgage lenders have tightened their underwriting criteria, being somewhat cautious about who they are willing to lend to. So even if you meet the minimum requirements for a mortgage, it can be difficult to qualify.
If you hope buy a new house or even refinance your existing mortgage, here are four things you can do to increase your chances of getting approved.
Check your credit score and make a report
Shop and Compare Mortgage Lenders
Pay off the debt
Avoid taking on new debt
1. Check your credit score and make a report
Your credit score is a key indicator of your overall credit health. Use a free service like Experian or Discover Credit Scorecard to get free access to your FICO credit score, which is widely used by lenders – you may even already get free access through your bank or lender.
Due to the pandemic, the three national credit bureaus are offering one free credit report per week until April 2021 – normally you can only get a free credit report from each bureau once every 12 months. Visit AnnualCreditReport.com to get your copy.
If you are confident in your credit score, you can plug some of your information into Credible’s free online tool to find out what type of mortgage rate you qualify for today.
If you have bad credit, you should look for ways to increase your credit score AS QUICKLY AS POSSIBLE. Improving your credit score doesn’t have to be a difficult task. Here are some simple ways to improve:
Pay your bills on time
Be aware of payment arrears
Pay off credit card balances
Keep a low balance
Dispute any errors or inaccurate information on your credit card report
2. Shop and Compare Mortgage Lenders
Every lender is different, not only in the way they underwrite mortgage applications, but also in the way they allocate interest rates. So while one lender may deny your request, another may be more than willing to finance the purchase of your home.
The more mortgage lenders you compare, the better your chances are of finding one or more lenders who will work with you. You’ll also improve your chances of getting the lowest possible interest rate.
Completing applications with multiple lenders can be time consuming, so consider using an online marketplace like Credible to shop and compare offers from multiple lenders in a place.
3. Pay off the debt
While your credit rating is a key indicator of your mortgage eligibility, another crucial element is your debt to income ratio (DTI)or the percentage of your gross monthly income spent on debt repayment.
Many mortgage lenders prefer that your total DTI stay below 36% and your initial DTI, which only includes housing costs, does not exceed 28%. While some may exceed these thresholds, the lower your ratio the better.
To maximize your efforts, focus on loans and credit cards with the lowest balances that you can pay off quickly. Even a small reduction in your DTI could make a huge difference.
4. Avoid taking on new debt
A mortgage is a major financial commitment, for both you and the lender, so it’s only natural that lenders are sensitive to other debts that could keep you from keeping your monthly payments. As you prepare for your mortgage, apply for a loan, and go through the process of buying or refinancing a home, it’s essential to avoid asking for other credit accounts.
If you anticipate needing a loan or credit card, complete this process six months or more before submitting your mortgage loan application.
What are the current mortgage rates?
Mortgage rates have fallen significantly in 2020, but between August and September, they remained somewhat stable. Unlike short-term loans, mortgage rates do not have a strong relationship to the prime rate or the federal funds rate.
However, they’re influenced by 10-year Treasuries and inflation rates, which were both relatively low in 2020. Here are the latest average mortgage interest rates for the week of October 8, according to Freddie Mac:
30 Year Fixed Rate Mortgages: 2.87%
15 year fixed rate mortgages: 2.37%
5/1 variable rate mortgages: 2.89%
Based on current mortgage and refinancing rates, now might be a good time to refinance. To see how much you could save on monthly payments today, calculate the numbers and compare loan rates and mortgage lenders using Credible’s free online tool.
The bottom line
If you have thought about to buy a house or refinance your mortgage, now is a great time to do it. There are even options with a low down payment if you don’t have a large savings account balance – although a smaller down payment may result in private mortgage insurance.
Before you submit your mortgage application, however, it’s important to make sure you’re a good candidate for a loan. If you have bad credit, existing debt, or more, be sure to do the above to improve your chances of getting approved. Check your credit score and work on paying off credit cards and other low balance debt.
Also, be sure to avoid re-applying for credit several months before you apply for a mortgage, as well as during the home buying process. And to guarantee you the best available rate, visit Credible to shop. You can also get in touch with experienced loan officers and get all your mortgage questions answered.
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