Best Practice for getting the best loan

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 Before you start shopping for a mortgage, you should prepare your finances in order to get your best possible rate.  There are many  factors that will determine the rate that the lending institution might give you.

Your shopping should start by taking a close look at your finances.

1. Clean up your credit rating

Even before you start shopping for a mortgage, you need to look at your credit rating and improve it, if necessary.  One of the main criteria used by the lending institutions is the FICO credit score. The higher the credit score, the lower your mortgage rate, having all other criteria the same. If you have a credit score of 760 or above, you will get a better rate. The difference in rate for someone with a 760 FICO score and someone with a 620 FICO score can be over 1%.  An FHA loan, that is the one issued by a Federal Housing Administrator, designed for low-to-moderate income borrowers, FHA loans require lower minimum down payments and credit scores than many conventional loans.  With this type of loan and a 3.5% down payment you need a minimum credit score of about 580.


Some tips for increasing your credit score are

- Pay your bills on time

- Pay down your debt

- Diversify your credit mix

- Avoid opening too many new credit cards at the same time

- Avoid closing old credit cards.


Paying your bills on time are not only for the credit cards, this include utilities, phone, car payments etc.  If you forget to make a payment, call your lender as soon as you discover the mistake and ask for forgiveness. Pay the bill and bring the account to current.   Keep you overall credit card utilization below 30 percent.  To calculate this, simply add all the credit limits from all your cards and divide it by Total of credit limits on all cards.

Most experts recommend keeping your overall credit card utilization below 30 percent. The easiest way to stay below that number is to pay off your credit card. A balance transfer to a 0 percent introductory offer for a set period of time can be a good idea while you can organize your finances. 

2. Income Stability

Mortgage lenders prefer having a stable employment for at least two years.  Changing jobs within the same field is not harming but changing jobs to a different field can lower your score.  Self-employment income is analyzed very carefully; they usually require that you document your business income for the past two years.   Long periods of unemployment won’t be favorable 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. 

3.  Debt-to-Income Ratio

Debt-to-income ratio (DTI) is the way that lenders measure an individual’s ability to pay monthly payments of a loan. This ratio comes in two ways. The back-end that is calculated by adding housing expenses plus all other monthly minimum debt payments divided by the individual stable monthly gross income.

The front end-ratio focuses in your home value expenses excluding all other debts.

Banks usually want to see a front-end-ratio of no more than 28% and back-end ratio of no more than 36%.  These ratios vary depending on the type of mortgage and all other factors.   The lower the DTI may result in a lower interest rate.


4.  Down Payment 

Mortgage price is adjusted based on risk factors. A minimum down payment of 20% is less risky for the bank that one of 5%, therefore the latest will carry a higher interest rate.

Having a 20% down payment has other advantages like to save on Private Mortgage Insurance (PMI),  that is an insurance that has to be paid when the down payment is less than 20%.   Is important to note, that an individual can contact the bank to remove the PMI after the 20% down payment has been reached.


5.  Cash Reserves

Liquidity is also looked in detail by the banks. It is measured in terms of the number of months worth of house payments you have saved in cash. This is money saved in savings accounts, certificate of deposits or money market funds. Retirement plans funds are not included.  The banks usually require that the individual have at least two months of mortgage payments in liquid cash. For higher risk loans the cash reserve might be higher.


6.  Finding the Best Mortgage Rates

When you are ready with your finances, you can start shopping for the mortgage.  Places lake is a very good place to start comparing rates. Your realtor will also be a good source of information on lenders. Companies like Coldwell Banker are affiliated with lending companies that provide not only good rates but also excellent customer service to their clients.  Other places to look are your Bank or Credit Union; they often have preferred rates for their clients.


Beatriz Rocha is a Real Estate Associate with Coldwell Banker in Miami, Florida