Getting approved for a mortgage loan can cause a great deal of anxiety for those aiming to purchase a home. From reviewing your credit profile to understanding your interest rate and all the documentation needed for approval; navigating this process is not for the meek at heart. The good news is that there is a tried and true path that if followed can relieve much of the anxiety.

Understanding Credit

Your credit score is the number one indicator of your interest rate. The higher your credit score the lower your interest rate. Your score is the numerical value of how likely you are to become delinquent in the next 90 days. There are 5 factors that affect your credit score and ultimately your interest rate when applying for a mortgage.

• Payment History
• Credit Utilization
• Length of Credit History
• Mix of Credit
• New Credit Inquiries

Your payment history is crucial to maintaining a high credit score. Just one missed payment can negatively impact your score for years and payment history accounts for 35% of your overall score.

Experian states “Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits”. Simply put, your credit utilization is how much of your credit you use. If you have a credit line for $100 and use $50 then your utilization rate is 50%. It is also recommended to keep your utilization rate under 30%. Utilization accounts for 30% of your overall score.

The age of your oldest, newest and the average of all of your accounts make up 15% of your total credit score. First time home buyers without a lengthy history of credit can use the credit history of a relative or close friend by becoming an authorized user on that person's seasoned credit account.

Credit mix speaks to the types of credit accounts that you have like car and student loans and credit cards to name a few. These types of accounts are either revolving or installment loans and having multiple credit accounts that within each of these types shows your ability to manage various types of debt. This factor accounts for 10% of your overall score.

The amount of times you apply for new credit or have a hard inquiry on your credit report affect 10% of your credit score. Too many inquiries within a short amount of time can negatively affect your score.

An excellent credit score can have a tremendous impact on your quality of life but for mortgagors who may have a few blemishes it is still very possible for you to obtain a mortgage loan that has a good rate with some loan options available for those with scores as low as 620. Taking a look at your credit report routinely will help you understand what your credit score means and give you the ability to make the best decisions concerning your credit.

Diving into Interest Rates

Aside from your credit score, there are other factors considered when it comes to your interest rate. According to the Consumer Financial Protection Bureau down payment, loan options, loan term, and interest rate type are all contributing factors to your interest rate.

A higher down payment usually means a lower interest rate since the higher the down payment the lower your cost to borrow. This is important to note because even a quarter of an interest point reduced in your rate can save you thousands over the long term of your loan.

Because of the plethora of loan options available your interest rate will be predicated on the type of loan you choose. Work with your lender to see which loan option is best for you and don’t be afraid to shop around. Buyers have a “shopping” window where comparing rates with lenders can be bundled into one inquiry instead of several.

The term or time frame associated with your loan will also have an affect on your interest rate. Shorter term loans like a 15 year mortgage have lower interest rates which in turn lowers your cost to borrow even though the monthly payments are usually higher.

There are two main types of interest rates: adjustable and fixed. Adjustable rates are usually lower than fixed rates but can increase over time costing

You more as the loan term goes on. In the current market fixed rates are historically low and make for a perfect time to secure a low rate now that can last you to the end of your loan term.

Interest rates have a great impact on how much your home loan will cost you. It is important to understand the many factors that make up your interest rate so that you can make the best decision for your situation.

Qualifying for a Mortgage Loan

Understanding your credit and how interest rates affect your purchase is an excellent step on the path to home ownership. Once you’ve conquered this it's time to qualify for a mortgage loan. Every lender is a bit different from the next but there are standard requirements to start the process of becoming prequalified.

Prequalification is the lenders initial look at your ability to purchase a home. The lender application will ask about your employment status, income earned, credit history, previous addresses, banking information, and marital status. The lender will also determine your debt-to-income ratio (DTI). DTI is preferred to be under 43% and is your total monthly recurring debts divided by your gross income. DTI is used to see how much home you can afford. If your DTI is low then you can typically be approved for a larger home loan since you have more of your income to use towards mortgage payments. Prequalifying with a lender gives you the maximum amount of your purchasing power. You can be prequalified in a few days if not hours. Once Prequalified you can begin to look for properties to purchase.

The credit, interest rate and mortgage loan process are all a piece of the biggest financial decision most will make in their lives. As inundating as it can be the benefits of using credit wisely to ensure the best interest rate will only make the mortgage process easier and cheaper in the long run.

Have questions? Email Kelsey!She can provide the details you need from the comfort of your own home.