Mortgage rates are near historic lows. Predictions that credit downgrade for the U.S. would send mortgage rates soaring haven’t come to pass (not yet, at least). So far, there are still chances to get incredibly low mortgage rates, whether you are buying a home, or refinancing your current mortgage. However, before you get too excited about the latest mortgage rates, it’s important to understand some of the mortgage basics. Here are 3 mortgage myths you should not believe:
Myth #1: A Good Income Means Good Loan Terms
Anyone who has tried to get a mortgage as a self-employed person knows that it’s far from easy to get a good loan rate, no matter your income. When I bought my home four years ago, before the mortgage market crisis, I had to go through an income audit in order to be approved.
Your 1099s aren’t as encouraging as a straightforward W-2. Additionally, those of us who are self-employed take care to use as many tax deductions as legally possible — and that can skew the view of income.
Besides, even if you have a good income, if your debt to income ratio is high, or if you have a low credit score, you might not get the best interest rate offered on the market.
Myth #2: Once You Get That Approval, You Are Set
Many people assume that once they are approved for a mortgage loan, they are all done with worrying about their credit scores, or other matters. However, this just isn’t the case. Many mortgage lenders pull your credit again between your approval and the loan closing. In fact, lenders might check your credit score again as near as five days before the loan closes. If that happens, and your credit score has taken a dive, then the financing could fall through at the last minute.
Remember that your credit might be checked again after mortgage loan approval. Avoid applying for new credit accounts, and avoid running up credit card balances. If you want the best mortgage rates, you need to keep your credit in good shape until the closing goes through.
Myth #3: As Long As You Pass the 30% Rule, You’ll Be Fine
If only! While the 30% rule can be a useful guide to helping you determine whether or not you can afford a mortgage (I like to use the 25% rule myself, and include all housing costs as they relate to my net income), it doesn’t have much bearing on whether or not you are approved for a loan at the best mortgage rates.
Many lenders, when deciding what mortgage rate to give you (and even when deciding to approve for the loan) use what is known as the 28/36 qualifying ratio. This ratio looks at how much of your income goes toward the mortgage payment each month, as well as how much of your total income goes toward debt payments — including the new mortgage — each month. This means that your mortgage should be no more than 28% of your income each month, and your total monthly debt payments shouldn’t exceed 36% if you want the best rates.
If you want to prepare your finances for the bets possible mortgage interest rates, you need to know what lenders are looking for, and avoid falling for mortgage myths that can lead you astray.