Mortgage companies are in the business of lending money. But they want to do it with the least amount of risk as possible. Lenders don’t want to foreclose. They don’t want properties to manage and worry about selling. They want to happily collect their interest and service their loans. That is why most conventional lenders make their best mortgage products — and rates — available to borrowers who pose the least amount of risk of foreclosure.
What Do Lenders Look For?
Getting the best rate on a mortgage is determined by many factors.
- Your credit score — One of the main ways a lender will decide on your credit-worthiness is your FICO credit score. Typically, the higher your credit score, the lower the rate you are offered on a conventional loan. The best rates are usually available to borrowers with credit scores of 740 or above.
- Your down payment — The higher your down payment, the less risk for the lender. The best rates go to those who can afford a down payment of 20% or more. In addition to a potentially higher interest rate, a down payment of less than 20% will require that you pay PMI each month on top of your monthly principal and interest payment to offset the risk to the lender.
- Your debt-to-income ratio — There are two components of DTI that a lender will look at when considering your application for a mortgage. The back-end ratio takes all your monthly payments including your proposed new mortgage payment and divides it by your monthly gross income. The front-end ratio only considers your housing costs excluding your other payments to creditors. Conventional lenders offering the best rates want to see front-end ratios of no more than 28% and back-end ratios of no more than 36%. Of course, these can vary by mortgage type and lender but, broadly speaking, a lender offering the best conventional rates stays pretty true to these numbers.
- Cash reserves — Lenders want to know that their borrowers have cash or investments on hand in case of unforeseen circumstances like the loss of a job. Lenders typically look for cash reserves equal to two months of mortgage payments after closing costs are paid.
- Employment stability — Conventional lenders look for employment stability of two years. Declining income or periods of unemployment will not look good on a mortgage application. To get the best rate and terms on a mortgage, you should show employment at the same job for two years or have made a position change to a higher-paying position during that time. Self-employed applicants have a more difficult time when it comes to mortgage approval. Business income must be documented for the past two years. You will also be required to execute IRS Form 4506 allowing them to obtain a transcript of your returns.
All is Not Lost
If you don’t fit into the underwriting criteria of a conventional loan, there are still good options for you. FHA loans, which are insured by the Federal Housing Administration, are available for borrowers with FICO scores that don’t quite meet the demands of a conventional mortgage. VA loans, insured by the U.S. Department of Veteran Affairs, are options for former or current U.S. Military, National Guard, or Reserves. Government backed mortgages have been specifically designed to assist borrowers who may not be able to quality for conventional loans and have less stringent qualifying criteria.
At First Savings Bank Louisville, we are happy to help you find the mortgage solution that works best for your financial situation and profile. Call us for a free consultation and let us help you find the right mortgage refinance product for you based on your individual needs. (502) 238-9655