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How to Get the Best Mortgage Rate
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By Chris Jennings
As a Credible authority on mortgages, Chris Jennings covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.
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Possibly. The COVID-19 pandemic has caused some mortgage lenders to implement stricter loan requirements. You now may need a higher credit score, larger down payment, and lower debt-to-income ratio to qualify for a home loan.
Despite these tighter requirements, the pandemic has also made certain aspects of the mortgage process more convenient. Virtual home tours have risen in popularity, as have electronic mortgage closings.
When you're shopping for a mortgage loan, you’ll be presented with both an interest rate and an annual percentage rate (APR).
The interest rate charged by the lender is the primary cost of borrowing money. It's how much you pay in interest charges each year when you take out a home loan, expressed as a percentage. The lower the interest rate, the lower your monthly payments and total repayment costs — all else being equal.
However, the mortgage interest rate doesn’t reflect the total cost of credit, including points, the origination fee, mortgage broker fees, and other charges you may pay when taking out a home loan.
The APR, however, includes these costs of credit. Think of the APR as the total rate you’ll pay for the loan, or the effective interest rate over the life of your mortgage; it’s the rate you’ll pay when you factor in the points, fees, and other charges you pay for the loan. This allows you to compare rates between loans and lenders as some have more fees than others.
When shopping for today’s mortgage rates, it's a good idea to compare the interest rate to the APR. The more fees and expenses you’re being charged, the greater the difference between the interest rate and APR. The best way to understand the difference between the interest rate and the APR is that if a loan had no fees, then the interest rate and APR would be the same.
After you submit your online application, you'll receive a disclosure called a loan estimate. When comparing your loan options, look for the interest rate on page one under “Loan Terms,” and the APR on page three under “Comparisons.”
If you're considering an adjustable-rate mortgage — an ARM loan — remember that both the interest rate and the APR can increase (or decrease), along with your monthly mortgage loan payments and total repayment costs.
Learn More: What Is a Mortgage Rate and How Do They Work?
Whether you’re a first-time homebuyer or not, shopping around for a mortgage rate can save you thousands of dollars over the life of your loan. But the interest rate is not the only consideration when comparing home loan products. It's also important to consider lender charges, credits, and fees.
Sometimes borrowers who know they’ll be in their home for many years will agree to pay “points” in exchange for a lower interest rate. But keep in mind that if you pay upfront fees to buy down your interest rate, it can take years to reap the benefits. A mortgage calculator can help you estimate how long it will take to break even if you're thinking about buying down your interest rate by paying points or fees.
Or borrowers who only expect to be in a home for a short time might agree to a loan with a higher interest rate in exchange for lender credits — money that helps pay their closing costs so they pay less up front. If you accept a loan with a higher interest rate in exchange for help paying your closing costs, remember that you’ll continue to pay for that convenience for as long as you have your loan.
Learn More: How Much It Costs to Buy a Home This Year
To find the best mortgage rates, it's important to compare rates from multiple lenders. The rates that you'll qualify for depend on each lender’s methods of evaluating your unique circumstances. Some of these include:
- Income
- Credit history
- Location and value of the home you're financing
The size of the down payment you're able to make — or how much home equity you'll have after refinancing into a new mortgage — can also be a factor.
If you’re looking for a “jumbo mortgage” that exceeds Fannie Mae and Freddie Mac’s conforming loan limit, you can expect to pay a somewhat higher interest rate. The 2022 conforming loan limit for single-family homes in most markets is $647,200, although the cost can be as high $970,800 in high-cost markets. Larger loan amounts are formally classified as non-conforming loans, and are informally referred to as jumbo mortgages.
Traditional banks and credit unions may offer competitive rates, but it’s also a good idea to check with direct home mortgage lenders and mortgage brokers. Mortgage brokers work with multiple lenders and can help evaluate the types of home loans available to you. Just be sure to pay close attention to fees as well as rates. Real estate agents often have lenders they prefer to work with, but before taking out a home loan or going forward with a mortgage refinance from a lender you’ve been referred to, make sure you’re not being overcharged.
Many homebuying and mortgage comparison websites provide average rates or rate estimates that are based on self-reported credit scores. These rates can be far off the mark when it comes to your credit history, and comparison sites often provide little or no information about fees.
Mortgage interest rates are driven by market forces. Rates can change on a daily or even hourly basis. Once you are ready to accept a loan offer, you may want to secure the rate by requesting a “rate lock.” If it's not locked, it can change at any time.
Lenders typically offer rate locks for periods of 30, 45, or 60 days. If you need to extend a rate lock, you may be charged an extension fee.
Even if your rate is locked in, your rate may change if your credit score or other information you provided changes when the lender goes to verify that information (your income or your debt to income ratio may change, for example). Your rate can also change if you decide to get a different type of loan or make a smaller down payment.
Once you take out a fixed-rate mortgage — like a 15-year fixed or 30-year fixed rate mortgage — the interest rate remains the same for the life of the loan. If you take out an adjustable-rate mortgage (ARM) loan, remember that ARM rates are not like fixed rates: The rate and payment can fluctuate. The initial interest rate can adjust every year after an introductory period of three, five, seven or 10 years, depending on the type of ARM chosen.
Learn More: How Mortgage APR Affects the Cost of Your Home
Lenders primarily look at four main criteria during the loan approval process:
- Minimum credit score
- Minimum down payment
- Maximum debt-to-income ratio
- Maximum loan-to-value ratio
These requirements can vary from lender to lender, but are largely dictated by Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), or Veteran’s Administration (VA) for most conventional and federal government loan programs.
Minimum credit score
The lower your credit score, the higher the interest rate you can expect to be offered by lenders, all other things being equal. If your FICO score is below the 620 minimum set by Fannie Mae and Freddie Mac, you might still be approved for a Federal Housing Administration (FHA) loan with a credit score as low as 500.Minimum down payment
To qualify for the lowest interest rates on conventional mortgages not insured by the FHA or VA, homebuyers will typically have to make a down payment equal to 20% of the home’s value. Fannie Mae and Freddie Mac require mortgage insurance for borrowers making smaller down payments. Private mortgage insurance is an additional cost that allows for down payments as low as 3%.The minimum down payment on FHA loans for borrowers with credit scores of 580 or higher is 3.5%. But FHA loans with minimum down payments of 10% are available to borrowers with credit scores as low as 500. Veterans might qualify for VA loans. VA loans can be used to purchase a home with no down payment.
Maximum debt-to-income ratio
Your debt-to-income ratio (DTI) represents the percentage of your monthly income that's required to meet ongoing expenses such as rent, utilities, car payment, and credit card bills. While mortgage lenders prefer that your DTI not exceed 36%, Fannie and Freddie will approve home loans with DTIs of up to 45% or 50%. FHA-approved lenders will go all the way up to 50% in some cases.Maximum loan-to-value ratio
The loan-to-value ratio (LTV) of a loan reflects how big the mortgage is in relation to the value of the home you’re financing. If you're putting 20% down on a home, the mortgage represents 80% of the home's value.An LTV ratio of 80% or lower is ideal, while a ratio higher than that will likely require private mortgage insurance (PMI). Lenders typically allow for higher LTV ratios when purchasing a single-family home, but you’ll usually need a lower LTV ratio to refinance your home or purchase an investment property.
Learn More: How to Apply for a Mortgage
When purchasing a new home, getting pre-approved for a mortgage is the first step toward home ownership and helps you determine the maximum home price you can qualify for. To become pre-approved or prequalified, you'll typically have to provide some basic information about your income and finances and agree to a credit check. Getting prequalified can help you make an offer on a home, and provides a good idea of the rates you'll qualify for. But a mortgage pre-approval or prequalification letter is not a guaranteed loan offer.
Learn More: How to Get Pre-Approved For a Mortgage Loan
Credible performs a "soft credit inquiry" to share your credit information with your selected lender. This allows the lender to display any loan options that you may be eligible for. If you see an option you like from a particular lender and want to apply for that loan, a hard credit inquiry will be performed. A hard credit inquiry will usually have only a minor impact on your credit score — typically no more than 5 points, but can be higher if you have a significant amount of hard credit inquiries over the recent past.
Many other mortgage lenders also use a hard credit inquiry to provide a mortgage prequalification or pre-approval letter. To protect your ability to shop rates, hard inquiries received from multiple mortgage lenders within a 45-day window are counted as a single inquiry.
Many mortgage comparison websites provide rate estimates that are based on self-reported credit scores. These rate estimates don’t require a credit inquiry, but will be less accurate than prequalified rates.
Learn More: How Your Credit Score Impacts Mortgage Rates
Once you've compared rates from multiple lenders and selected an option that's right for you, you'll be asked to verify your identity and income when you apply. Documents you may be asked to provide include:
- Drivers license
- Social Security Card
- Your two most recent bank statements
- Signed tax returns for the last two years
- Two years of W-2 forms
- An estimate of your home value (an appraisal or recent sale price)
- Documentation of the source of funding for your down payment (for home purchase mortgages)
- For new home purchases, you’ll also need to submit the home purchase contract.
If your application relies on income from sources other than a job, such as self-employment or rental income, you'll need documentation showing you can expect to continue receiving it.