When it comes to buying a home, there are several factors that can affect your monthly mortgage payment. Understanding these factors, sometimes referred to as PITI, will help you make an informed decision when it comes to purchasing a home. The first factor is your credit score. Generally, consumers with higher credit ratings receive lower interest rates than those with lower credit ratings.
Lenders use your credit score to determine how reliable you will be in repaying the loan. Credit scores are calculated based on information in your credit report, which includes your loans, credit cards, and payment history. If you don't know your credit score, there are many ways to get it. You can also use our Explore Interest Rates tool to see how you could save more on the mortgage interest rate with higher credit scores.
It's important to note that many lenders offer slightly different interest rates depending on the state you live in. To get the most accurate rates with our Explore Interest Rates tool, you'll need to indicate your state and, depending on the amount and type of loan, also your county. Additionally, homebuyers can pay higher interest rates on loans that are particularly small or large. The second factor is the amount you'll need to borrow for your home loan.
This is the price of the home plus closing costs minus your down payment. Depending on your circumstances or the type of mortgage loan, your closing costs and mortgage insurance may also be included in your mortgage loan amount. Enter different home prices and down payment information in the Explore Interest Rates tool to see how it affects interest rates in your area. In general, a higher down payment means a lower interest rate, because lenders see a lower level of risk when you have more ownership interest. So if you can comfortably put in 20 percent or more, do so - you'll usually get a lower interest rate.
If you can't make a down payment of 20 percent or more, lenders will generally ask you to purchase mortgage insurance, sometimes known as private mortgage insurance (PMI). Mortgage insurance increases the total cost of the monthly mortgage loan payment. As you explore potential interest rates, you may be offered a slightly lower interest rate with a down payment of just under 20 percent compared to a rate of 20 percent or higher. This is because you pay for mortgage insurance that reduces risk to your lender. It's important to consider the total cost of a mortgage - the higher the down payment, the lower the total cost of the loan.
Getting a lower interest rate can save you money over time. The third factor is the term of your loan. You can use our Explore Interest Rates tool to see how different durations and rates would affect your interest costs. Your initial interest rate may be lower with an adjustable-rate loan than with a fixed-rate loan, but that rate could increase significantly later on. The fourth factor is the type of loan you choose. There are several broad categories of mortgage loans including conventional, FHA, USDA, and VA loans.
Lenders decide what products they offer and each type of loan has different eligibility requirements. Rates can be significantly different depending on the type of loan you choose. Talking to multiple lenders can help you better understand all of the options available to you. When applying for a mortgage, reviewing your credit rating is one of the first things most lenders do. The higher your score, the more likely you are to be approved for a mortgage and the better your interest rate. For a conventional mortgage, you'll usually need a credit score of at least 620 although you'll pay a higher interest rate if your score falls below the mid-700s.
To qualify for a conventional mortgage, your debt-to-income ratio is usually capped at a maximum of around 43%, although there are some exceptions. Smaller lenders may be more lax in allowing you to borrow a little more while other lenders have stricter rules and limit your DTI ratio to 36%. Unlike credit scores, the FHA and VA guidelines for DTI are quite similar to the requirements for a conventional loan. For a VA loan, the preferred maximum debt-to-income ratio is 41%, while the FHA generally allows you to go up to 43%. However, it is sometimes possible for borrowers with higher DTIs to qualify for these loans. Lenders usually want borrowers to deposit money in their home so that they have some equity in it. This protects them because they want to recover all funds lent if borrowers don't pay back their loans.
If borrowers borrow 100% of their home's value and don't repay their loan, lenders may not get their money back.
