Aspects That Have An Impact On Your Mortgage Rate

The rate of interest on a loan is the primary concern for any mortgage borrower. Monthly payments on a loan comprise the principal and interest. Lower the rate of interest, lower the monthly payment. As mortgage loans are large, even a single percentage point makes a significant differenceto the total amount of interest paid. Three main factors determine the mortgage rates:

  • Your credit score
  • Your income and expenditure
  • Employment history

How Healthy Is Your Credit Score?

Higher credit scores attract lower interest rates and vice versa. Your credit score is an indicator of your ability and willingness to pay your dues on time. Lenders want to see your credit report because it gives them a good idea about your financial health and credit history basis which they will suggest a suitable loan option. Lenders like to choose borrowers whose report displays:

  • A credible history of scheduled payments
  • Low indebtedness
  • Credit utilisation by way of credit cards, auto loans etc.

If your credit score is between 833-1200 you will have an easy approval as well as more options. A credit score of 726-832 will help ensure you get good loan options from lenders.

A score of 622-725 also gives you a good chance of getting pre-approved, while 510-621 will attract some evaluation. For a credit score below 509, the interest rates will typically be very high. Most of the lenders will turn down prospective borrowers with a credit score below 509.

Income and Expenditure

Every lender wants to make sure that the money lent is returned on time. They will not allow you to borrow money beyond your capacity to pay. As a thumb rule, your liabilities should not exceed 40% of your gross income for being eligible for a home loan. This percentage is arrived at by using debt-to-income ratio and is deemed to be as important as your credit score.

There are more tests to pass through. Lenders will want to seethe proof of at least 4 to 6 months of emergency funds or reserves. You may be holding them in different forms like cash in a savings account, stocks, bonds, mutual funds as also insurance policies and retirement accounts.

Your Employment History Counts

Most lenders will ask you to submit two years paystubs and tax returns as tangible proof of employment preferably in the same industry. However, if you are a casualty of adverse economic conditionsas many others, you can still hope to get a home loan, albeit at a higher interest rate, provided you fulfill all other criteria.

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