What’s an interest rate?
An interest rate, or a mortgage rate, is the rate of interest added on to any given loan. In layman’s terms: the percentage of $ added on to your principal loan (read: the way the bank or lender makes their money). Some of what determines an interest rate is up to the Federal Reserve, but most of it depends on you and how your finances are.
Get your credit in check
This may seem obvious, but making sure your credit score is in good standing is a huge factor for securing a reasonable interest rate. If you’ve always had good credit, great — but if your credit score is low to average, consider giving yourself a year or two to work on it (pay all your bills on time!) before applying for a mortgage. Remember that a good credit score shows not only financial stability but also a sense of responsibility, which goes a long way when applying for a loan.
Lower your debt-to-income ratio
If you owe almost as much towards your debts each month as what you’re bringing in from your income, that’s a red flag. Ideally, this won’t be the case. A 40% or lower debt-to-income ratio is the sweet spot to aim for; any higher than that and this could affect your potential interest rate just as much as your credit score. There are a few ways of lowering your debt-to-income ratio; either consider a second job to bring in an additional income, or try to pay down your debt more each month so that it’s eventually easier to manage.
Prove employment history & income stability
Two additional ways of showing your financial credibility to potential mortgage lenders is to prove both employment history and income stability. Whether or not you’ve been at the same workplace for a decade isn’t as important as proving that you haven’t ever been unemployed for extended periods of time, and that you stick around at your jobs for considerable lengths. This shows that you’re more likely to be able to pay your mortgage every month. Another way of instilling trust in your financial situation is to show income stability — namely, that your line of work isn’t going anywhere anytime soon, and that your industry is continuing to thrive.
Taking these initial steps to improve your financial trustworthiness can go a long way when attempting to secure a reasonable interest rate for your mortgage loan. If you’re ready to take the next steps towards securing your new home, check out our additional tips for a successful home purchase, or call Homeland Lending today at (201) 808-8181.