- Mortgage loan rates repeatedly hit record lows during the pandemic.
- Rates are now much higher -- over 5.00% for a 30-year fixed rate loan, on average.
- Home buyers will need to shop around more carefully and take more steps, like paying off debt and getting paperwork organized, to get an affordable loan.
Taking these nine steps can make a huge difference in how expensive your mortgage is.
During the heart of the pandemic, qualifying for an affordable loan was pretty easy for most home buyers. Rates repeatedly hit record lows and it was possible to get a 30-year fixed-rate mortgage for under 3.00% if you had reasonable financial credentials.
Things have changed, though. Rates have gone way up and are now over 5.00% on average for the popular 30-year loan option. This has obviously made borrowing much costlier.
That doesn't mean would-be homeowners should give up on getting a reasonably priced mortgage, though. While no one is going to get a rate close to 3.00% anymore, it is possible to get the lowest cost loan possible in today's market by taking these nine key steps.
1. Improve your credit score
Credit is the one of the most important things lenders look at when setting your rate. If you can improve your credit score, you'll become a much more competitive borrower. A score above 720 to 740 can help you get the very best rates available at the time you're borrowing.
Improving your credit score can be done by reducing the amount of your available credit used, becoming an authorized user on someone's credit card that has a solid credit history, or asking your lenders to voluntarily remove negative information if you have generally been a good customer who pays on time but you have a mistake or two in your past.
2. Pay down your debt
Repaying your debt helps you improve your credit score, which can help you get an affordable loan. It also improves another key metric that lenders look at: your debt-to-income ratio. This is the ratio of debt relative to what you earn. The lower it is (which means the less debt you have), the more competitive your rate will be because you will be seen as a less risky borrower.
3. Set a budget
You'll want to set a realistic budget for how much you can afford to borrow. This will help you qualify for a more competitive loan since you reduce the risk to a lender by borrowing only what you can easily afford to repay. If you can borrow less, your mortgage is also going to be more affordable than if you took out a larger loan -- even if you can't get a rock-bottom interest rate.
4. Get your paperwork organized
Lenders are going to ask for a lot of paperwork, and it's best to have it ready so you can move quickly with getting approved before rates rise even higher. You should expect to provide tax returns, pay stubs, bank statements, and other proof of assets.
5. Decide what type of loan is right for you
There are many different kinds of mortgages. A 15-year loan is an alternative to a 30-year loan, for example. It will come with a lower rate, but higher monthly payments because you've shortened the timeline for paying back your loan in full. Think carefully about different term lengths to make the best choice for your needs.
6. Get multiple lender quotes
Since rates and loan terms vary by lender, you don't just want to get the first loan someone is willing to give you. You should get multiple quotes on your mortgage from at least three different mortgage lenders, and ideally more. Online lenders, local and national banks, and credit unions are all worth looking at.
7. Get pre-approved
Once you've found an affordable loan, get pre-approved. This means submitting all your financial details and getting approved, conditional upon finding an eligible house and not making big changes to your financial situation.
When you get pre-approved, you usually have the option to lock in at the current rate you're offered at the time. This can help you avoid rate hikes that could be coming in the next few months.
8. Shop around for the perfect home
You'll want to make sure you find a home that your lender will allow you to borrow to buy. Specifically, look for a home that's priced within your budget and that is priced reasonably given market conditions. Lenders require an appraisal, and if a professional appraiser says the home isn't worth as much as you offered, this could create problems getting final approval on a mortgage loan.
9. Avoid mistakes before closing
Finally, you want to make sure you don't do anything to jeopardize your mortgage before closing. Avoid changing jobs or borrowing more money, both of which are red flags that could cause a lender to get concerned.
By following these nine steps, you should hopefully be able to get a mortgage you are happy with even if rates are higher than they were a short time ago.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.