The borrower who is most prepared will win the race. In other words they will win the best rate and best program and will most likely beat out other offers. You can never over prepare for the mortgage process.
The burning question in the mind of the home buyer is “What is the interest rate?” After making sure they get the lowest rate possible, in turn the lowest payment becomes a priority. Interest rate might seem like a general figure and easy to determine. The opposite is true. Many factors determine the qualifying rate.
Loan program and repayment term are the first parameters that need to be decided. There is more incentive in a shorter term, such as 15 years versus 30 years. Since the lender will recoup the money faster, the risk is lower and so is the interest rate.
The credit score is the biggest factor in determining a borrower’s interest rate. Although minimum credit score requirements can vary depending on the lender, a 640 median score (this is the middle FICO score of the three credit-reporting bureaus) is the low end of the spectrum. Conventional loans require a median credit score of 740 or above for premium rates. Federal Housing Administration and Rural Development loans are more forgiving when it comes to lower credit scores as these are tailored more to first-time home buyers who might not have established a credit history.
Having your credit pulled once a year is a good maintenance program that can ensure your credit report stays intact and free of collections. Most borrowers are not even aware of collections on their account or derogatory tradelines (accounts that have been paid 30 days past the due date). Creditors send borrowers to collection agencies when they are unable to reach borrowers for payment. Typically people are unaware that these bills are outstanding, and sometimes the bills can be removed from the credit report with the proper documentation.
Another factor that will affect the interest rate is the loan amount. Rates tend to increase on loan amounts under $100,000. The lending institution is not profiting as much in interest, so a higher rate helps offset that. A more substantial down payment is another option for reducing the interest rate. The more money a borrower is willing to contribute up front, the less likely they will be to default on the mortgage.
However, for home buyers who have the proper knowledge and preparation before getting a mortgage, both defaulting and dealing with a high interest rate are far less likely.