Obtaining a great rate on a mortgage is about more than just comparing lenders. The mortgage industry examines a number of factors to determine not only if you qualify for a mortgage, but also what interest rate you’ll pay.
Mortgage lending today is based on tiered pricing, which means that rates are adjusted based on various criteria. The difference can mean a much higher or lower monthly payment and tens of thousands of dollars in interest payments over the life of the loan.
Below are some of the key criteria that mortgage lenders evaluate, as well as some tips you can use to improve your current standing.
Your credit score is one of the most influential tools used to evaluate your financial profile, whereby all things being equal, the higher your credit score, the lower your mortgage rate.
Checking your credit score is easy and free through sites such as GetCreditScore.com.au, which ranks consumers credit history from zero to 1200, providing a realistic snapshot of their financial status before they approach a lender.
A credit score can be affected by late payments, whether an overdue bill was eventually paid, the amount owed in a missed payment and whether there were consecutive missed payments.
If you have a good or excellent score between 622 and 1200, then you can feel confident when approaching a credit provider for credit.
Employment and Income Stability
Mortgage lenders prefer candidates that can prove steady employment for at least the past two years. Long periods of unemployment won’t bode well for your application, and neither will a pattern of declining earnings. Ideal candidates will have been at the same job for at least the last two years, or have made a job change to a higher paying position during that time.
As a general rule, you’ll need a minimum down payment of 20% of the purchase price of your home in order to get the best mortgage rate. Any less than this and lenders will require you to pay private mortgage insurance.
In Australia, private mortgage insurance typically costs from 0.5% to 1% of the entire loan amount on an annual basis.
In the mortgage world, cash reserves are measured in terms of the number of months worth of house payments you have saved in cash.
The standard requirement for cash reserves on a mortgage is two months – as in you must have enough liquid cash after closing to cover your new mortgage payment (principal, interest, taxes, and insurance) for at least the next 60 days. On higher risk mortgages, the cash reserve requirement may be higher.
Finding the Best Mortgage Rates
Once you’ve positioned yourself for the best mortgage rate, it’s time to comparison shop.
This can be a time-consuming, confusing, and even emotional process with low rates accounting for just one aspect of choosing a lender, so it’s important that consumers take their time and shop around before settling on a mortgage. Alternatively, you can speak to a mortgage broker for advice and variety on rates,
If you’re in the market for a new mortgage, or would like to better understand your options when it comes to refinancing an existing one, get in touch with one of our ChapterTwo consultants for some free advice.