This article is from an interview we did to address which factors can impact a buyer’s mortgage terms.
- Can you outline what factors of a buyer’s financial profile can influence their mortgage terms?
Almost every aspect of a buyer’s financial situation can influence their mortgage terms and affect what loan programs they may be eligible for. One of the major factors for your mortgage terms is the buyer’s credit score. Although 580 is the minimum score for some programs, the higher your credit score the more opportunities you may have including lower downpayments (even $0 with down payment assistance) and a lower interest rate.
Another factor that impacts your terms is your downpayment. Although there are some exceptions, the more you put down the more advantageous your loan terms. Putting more down will increase your buying power while also lowering your monthly payments, so having more assets increases the options available to you.
One more factor that is rarely considered is your total debt-to-income (DTI) ratio. This is calculated as your total overall monthly obligations including your proposed housing payment divided by your gross monthly income.
Although having a higher DTI will not directly increase your interest rate, it will impact the loan programs you may qualify for and indirectly limit a buyer from a potentially better option.
- What factors of a mortgage can vary from borrower to borrower?
When it comes to a specific buyer, their mortgage should be tailored to their situation and goals. Not only does it come down to which loan program might be the best fit, but also looking at all loan terms. For one, whether an adjustable-rate mortgage (ARM) might make more sense than a fixed-rate mortgage. Considering the length or term of your mortgage is also important and can impact what you might qualify for. Then based on the buyer's financial profile, nailing down an interest rate that works for them. Even then, a buyer has the option to "buy down" their interest rate by paying points (where one point is 1% of the loan amount). However, this is a trade-off, since the points increase exponentially the more you wish to buy the rate down and there are regulations on how many points can be charged. Working with a lender who not only understands but can communicate this trade-off for your situation is essential for not spending too much money up-front but also not paying too much each month.
- Is what’s publicly advertised (for example, interest rates are at 6%), the best available terms a borrower can get? Or, are there scenarios where a borrower could get a lower rate than what’s being advertised? Please explain.
This is a commonly asked question that is very important to make clear. The terms publicly advertised are more often than not “trigger terms” meant to draw a potential borrower in. Although those advertised rates do exist, when reading through the legal disclosures attached you will see who would qualify for that rate and the high amount of points that they would pay. For example, see the following pulled from one of those advertisements:
"An interest rate of 6.375% (6.673% APR) is for the cost of 1.875 point(s) ($4,687.50) paid at closing. On a $250,000 mortgage, you would make monthly payments of $1,559.68. Monthly payment does not include taxes and insurance premiums. The actual payment amount will be greater. Payment assumes a loan-to-value (LTV) of 60.00%. Your debt-to-income ratio is less than 43%. Your credit score is 740."
Every borrower’s situation will be different and so those rates publicly advertised, although possible, are most likely going to vary from your actual interest rate. After speaking with a lender and them reviewing your financial situation, then and only then would they be able to quote you an accurate interest rate.
- What should borrowers do to get the best mortgage terms?
To get the best mortgage terms, a potential borrower needs to speak with a lender that offers a variety of loan programs and one that will take the time to work through those different options.
It is very easy for a lender to offer a small handful of products and fit all of their borrowers into those programs even when those might not be the best option for their situation.
- Anything else about mortgage terms borrowers should know?
You won’t know what mortgage terms are available to you until you take that first step and reach out! A lot of people sometimes get stressed when they go to buy a home because they don’t quite understand the homebuying process, they are concerned about whether now is even a good time to buy and they don’t know if they can even afford it. What our team at Gold Star Mortgage does is help people like that navigate the whole homebuying journey, take the worry out of timing the market, and just help advise them on different financing strategies for their situation so they can relax and focus on the more important things in their lives.
