5 Tricks To Getting A Great Mortgage Rate in Houston

Mortgage lending today is based on tiered pricing, which means that rates are adjusted based on various criteria. One of the main criteria used is your FICO credit score. Your credit score will help to determine whether you qualify for the loan and what rate you’ll pay on your loan, and there is an inverse relationship. The higher your credit score, the lower your mortgage rate, all other things being equal.

According to myFICO.com, the best mortgage rates are available to borrowers who have credit scores of 760 or above. As your score goes lower, your interest rate goes up. With some exceptions noted below, the lowest score needed to qualify for a mortgage is 620. At today’s mortgage rates, however, a score of 620 will qualify for a rate of 5.022%, while those with a score of 760 or higher will enjoy a lower rate of about 3.433%.

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. In a perfect world, you have been on the same job for at least the last two years, or have made a job change to a higher paying position in that time.

Lenders tend to be especially strict when it comes to self-employment income. According to Bankrate, they will require that you document your business income with income tax returns for the past two years. And they will generally have you execute IRS Form 4506, which will enable them to obtain a transcript of your returns in order to verify they are the same ones you sent to the IRS.

Debt-to-income ratio - also called DTI - comes in two forms. The back-end ratio measures the total of all of your monthly minimum debt payments, plus your proposed new housing payment, divided by your stable monthly gross income. The front-end ratio focuses just on your housing costs, excluding all other debts. Historically, banks have wanted to see a front-end ratio of no more than 28% and a back-end ratio of no more than 36%. Depending on the type of mortgage and other factors, however, these ratios can go higher.

For example, the maximum back-end DTI is 43% for an FHA loan. There may be some flexibility, however, if you meet certain criteria. For example, the mortgage lender may allow you to exceed the limit if you are strong in every other area of your loan application. Further, a lower DTI may result in a lower interest rate.

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 rates. Since mortgages are price adjusted based on risk factors, a loan with 5% down is considered higher risk than one with 20% down, and will carry a higher interest rate.

But that isn’t the only reason to save up 20%. When your down payment is less than 20% of the purchase price, you will likely have to pay PMI, or private mortgage insurance.

On a conventional loan with a 5% down payment, mortgage insurance will effectively add .62% to your payment (assuming a credit score of between 720 and 759). On a $200,000 mortgage, this will translate into an annual premium of $1,240, adding an additional $103.33 to your monthly house payment.

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 reserve includes money saved in checking or savings accounts, money market funds, or certificates of deposit. However, it generally does not include funds in a retirement plan since that money can only be withdrawn after paying taxes and penalties.

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.