By Daniel Bortz
From Kiplinger’s Personal Finance
Looking to purchase a home in this market? Take these steps to qualify for the best mortgage rates.
- Increase your down payment
To qualify for the lowest rates on a conventional loan backed by Fannie Mae or Freddie Mac—the nation’s two largest mortgage buyers—you’ll need a 20 percent down payment, says Melissa Cohn, a regional vice president at William Raveis Mortgage, based in Shelton, Conn.
“The bigger your down payment, the better the rate,” Cohn says.
Need a little help piecing together a bigger down payment? Check out national and local down payment assistance programs, says Ralph DiBugnara, with Cardinal Financial, an Arizona-based mortgage lender. You can research eligibility requirements for thousands of down payment assistance programs at
DownPaymentResource.com.
Generally, consumers need a FICO score of 760 or higher to be eligible for the lowest mortgage rates on a conforming loan, says John Ulzheimer, a credit expert.
A conforming loan is one that follows guidelines set by Fannie Mae and Freddie Mac; currently, the conforming-loan limit in most areas of the country is $647,200.
You may be able to get a free credit score estimate through your bank or credit card issuer, or from a website such as Credit Sesame or Credit Karma—or use MyFICO’s credit score estimator tool.
If your credit score needs a boost, there are steps you can take to give it a quick lift. However, your best strategy will depend on why your score is lagging.
“Paying down some of your credit card debts can yield a higher FICO score in as little as two weeks,” says Ulzheimer, pointing out that your credit-utilization ratio—the amount of available credit you use—makes up 30 percent of your FICO score. A good rule of thumb: Use 30 percent or less of your available credit.
Nearly half of consumers get only a single quote when applying for a mortgage, the Consumer Financial Protection Bureau reports. But you’re more likely to find a lower rate if you shop around.
According to a study by Freddie Mac in 2018, borrowers who obtained two rate quotes saved an average of $1,500 over the life of their mortgage, and those who obtained five quotes saved an average of about $3,000. Get quotes from at least three lenders.
- Consider an adjustable-rate mortgage (ARM)
ARMs developed a bad reputation after the housing market crashed in 2008 because so many under qualified borrowers couldn’t keep up with their ARM payment increases. But today’s ARMs have more protections built in than pre-2008 ARMs and can be a good option for some buyers.
An adjustable-rate mortgage starts out at a lower interest rate than you would get with a fixed-rate mortgage. Then, after a specified period of time—usually three, five, seven or 10 years—the rate adjusts based on market indexes, though there are caps on how high interest rates on ARMs can go.
(Daniel Bortz is a contributing writer at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
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