Level of Income and Asset Documentation
The more documentation you provide the lower your interest rate will be, guaranteed. The lender will always prefer to know more about you than less so when you provide them that information they reward you with access to lower interest rates. Generally, the lender will want to see evidence of your income and your assets. Proof of your income and assets will help them determine whether or not they believe you will be able to maintain your monthly payments. More assets shows that you know how to save your money and you have a failsafe in the case of emergencies. More income shows that you have more than enough monthly cash flow to be able to pay your mortgage. To learn more about the differnet levels of income and asset documentation, read our article: "Full Documentation, Stated Income--What Are They?"
Income
Your level of income in relation to your level of debts determine your debt-to-income ratio or DTI. The lender calculates the DTI by taking your debts (e.g. monthly payments on your credit cards, car loans, students loans, etc.) plus your future monthly mortgage payment, property tax, and insurance and divides that by your monthly gross income. The higher the percentage, the higher the interest rate. The general guideline is for the borrower to have a DTI of lower than 45%, however there are certain lenders that allow for exceptions.
Assets
The amount of assets you have in your bank accounts, your retirement funds, your stock portfolio, all count to the lender. For the most part, lenders require at least 2 months worth of your future monthly mortgage payment, monthly property tax, and monthly property insurance; these funds generally need to have been in your possession for at least 60 days or 2 months. Keep in mind that this amount is in addition to the amount you will need to pay for your down payment and closing costs. Most lenders only consider the liquid assets (i.e. funds in accounts where you can easily draw money such as checking accounts, saving accounts) you have, but some lenders also allow a certain percentage of retirement funds and stock portfolio funds to count towards your assets. The more assets you have, the better.
Credit Score
Your credit score is one of the most important factors of your interest rate. Most lenders' programs are determined primarily on your credit score. Having a credit score of 720+ will give you access to more programs and better interest rates than having a credit score of 650. With the recent shake up of the subprime market, lending guidelines and standards have also tightened making qualifying for a loan with lower credit scores and higher loan amounts more difficult. Where a few years ago 100% financing was a simple request, with a credit score of lower than 680 this type of financing can become quite costly if not impossible in some cases. If you would like to read more about improving your credit or just learn more about how your credit score is determined, please browse through our credit section of our Library.
Loan Amount vs. Property Value
This is also a very important factor in determining your interest rate. The higher your loan-to-value, the higher your interest rate. Loan-to-value is calcuated by taking your total loan amount and dividing that by the sales price or value of your property, whichever is lower. If you are refinancing, the lender uses the appraised value. If you require 100% financing, in other words if you do not plan on having a down payment, your interest rate will be significantly higher than the interest rate of an individual who will be buying a property with a down payment of 20 or 30 percent.
Loan Amount
The amount of your loan does make a difference--this is where you hear the terms conforming and jumbo. For single family homes, condominiums, and townhomes, the conforming limit is $417,000--so any loan amount $417,000 or less is considered a conforming loan amount. Any loan amount above that is non-conforming or jumbo. Conforming loan amounts will have lower interest rates than non-conforming loan amounts.
Points
There are two facets in this category. 1) You can pay points to lower your interest rate. Lenders allow you to "buy down" your interest rate by paying points up front to them. Keep in mind that 1 point does not lower your interest rate by 1%--the amount 1 point will buy down your interest rate depends on the lender. 2) You can choose to not pay your mortgage consultant their point up front and instead have it embedded into your mortgage. The lender will then essentially pay the consultant the point and build repayment of this point into your loan by increasing your interest rate.
Property Occupancy Type
Owner occupied properties will always have lower interest rates than non-owner occupied or investment properties, guaranteed. The reason behind this is that it is much easier for a borrower to walk away from an investment property than it is for a borrower to walk away from his or her home. Also, generally speaking, borrowers tend to put more sweat equity and focus their improvement projects on their homes rather than their investments. Financially speaking, borrowers will not only stay with their homes because it is the roof over their heads but also because they have most likely put more money into their home for improvement or enhancement projects than their investment property.
Type of Property
The type of property you purchase or refinance affects your interest rate. Condominiums and townhouses usually have a marginally higher interest rate than single family homes. Duplexes, triplexes, and fourplexes will have higher interest rates than single family homes as well. However, if you have a low loan-to-value, such as 65% or less, then most lenders do not "penalize" for duplexes, triplexes, or fourplexes.
Current Employment and Employment History
Unbeknownst to many borrowers, your employment history makes a difference. If you have stayed at the same job or have kept jobs in the same line for over two years, lenders will have no problem accepting your application on this front. This also generally applies to students who have been in school and then accepted jobs in the same line of work as their school degree (e.g. a student just graduated with a B.S. in Bioengineering and began a job a year ago as a researcher for a BioTech company). However, if you have had multiple jobs in completely different lines of work or industries, this makes obtaining a lower interest rate difficult. It is not impossible--there are lenders that allow exceptions and have more flexible guidelines, however the tradeoff is a mortgage with a higher interest rate.
