Low mortgage rates: What to do if you think you can’t qualify

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Today’s homebuyers have the advantage of shopping in a low mortgage-rate environment, as current mortgage rates have fallen to around 3.73 percent. But not everyone qualifies for the lowest rates available, or can even qualify at all for a mortgage or a refinance.

Credit score, down payment and even comparison shopping are all important factors that play into the rate you receive. Here’s a breakdown of why these things can prevent you from scoring the lowest rate available and what you can do to change it.

1. Improve your credit score

A credit score is one way lenders try to predict whether borrowers will pay their loan on time and be able to afford the mortgage payments. Borrowers with excellent credit scores are rewarded with the best rates because they’re perceived to be less likely to default or make late payments. Lenders hedge their risks by increasing rates for borrowers with lower credit scores.

To get an idea of the interest rate you might qualify for, start by checking your FICO score, which is the score lenders use that is based on your credit report. Consumers are entitled to one free credit report per year from each of the three major credit reporting agencies: Experian, TransUnion and Equifax. It usually costs extra to get your FICO score, though many credit card issuers provide it for free.

In addition to the score, consumers will get insight into the five components that make up the score and how those factors are impacting it. These components, which are weighted differently according to FICO, include:

  • Payment history (35 percent).
  • Amounts owed (30 percent).
  • Length of credit history (15 percent).
  • New credit (10 percent).
  • Credit mix (10 percent).

“For example, if you maintain a balance on your credit cards, it will appear on your report as ‘revolving credit utilization;’ lowering that amount will raise your credit score,” says Judith Corprew, executive vice president of chief compliance and risk at Patriot Bank. “Also consider late payments. Remembering to pay bills on time and in full will help your credit score (not to mention reduce late fees).”

Hard inquiries on your credit report can also lower your FICO score. Hard inquiries include loan and credit card applications, and might indicate that you need money or are at risk of overextending yourself.

“Don’t apply for credit unless you need it. And definitely don’t apply in the six months preceding your loan application,” says Adrian Nazari, founder and CEO at Credit Sesame. “However, you can shop for mortgage rates without worrying about multiple inquiries because the only way to compare loan offers is to apply with more than one lender.”

Finally, if you see an error on your credit report, you can dispute it. Clearing up mistakes will also help you improve your score. Credit scores are updated every 30 to 45 days, according to TransUnion, and credit bureaus usually update your file as soon as they get new information from creditors. So, if you pay off debts and avoid opening new lines of credit, you might see your score increase in as little as a month.

2. Make a bigger down payment (or look for low down payment options)

Bigger down payments can often help borrowers secure a lower interest rate. The reason is that the loan-to-value ratio, or LTV, is lower with larger down payments, which reduces how much the lender would lose in case of default.

This is another instance of risk-based pricing. Lenders reward low-risk customers with lower interest rates.

“The larger the down payment you put forth, the better the odds of lowering your interest rate and monthly payment,” says Chris de la Motte, co-founder and president at Simplist. “If you’re not quite at your target number yet, there are plenty of ways to trim additional expenses — and they can really add up. Whether it’s pausing the gym membership to run outside and participate free local classes, or forgoing the daily office cafeteria run in favor of a little meal prep action, little things can make a big difference. You’ll be there in no time.”

That said, there are plenty of loans available at low interest rates with as little as a 3 percent down payment. Look into FHA loans and programs through banks that specialize in low down payments. And if you want to refinance your current mortgage, no down payment is generally needed as long as you have sufficient equity in the home.

3. Compare offers from multiple lenders

Research shows that shopping around for a mortgage can save consumers hundreds or even thousands of dollars. According to a 2018 report from Freddie Mac, borrowers can save “an average of $1,500 over the life of the loan by getting one additional rate quote and an average of about $3,000 for five quotes.”

Bankrate’s mortgage rate tables are updated regularly, so you can start by doing your research online. Be sure to shop at your bank and even online lenders.

Consider that the difference between 8 basis points can save you $140 per month. A $300,000 mortgage with a 4.5 percent rate will cost $1,520 in principal and interest per month compared with a 3.7 percent interest which comes to $1,380 per month. That difference adds up over time, so it’s worth taking the time to improve your score, save for a bigger down payment and shop around for a better rate.

If your credit is less than stellar, it pays even more to shop. Some lenders will welcome your business with competitive rates while others may not. Mortgage brokers are another good way to find a lender if your situation is out of the ordinary.

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