Four Ways to Get a Better Loan Interest Rate
The era of rock-bottom interest rates seems to be coming to a close, but demand for credit and housing shows no signs of slowing down. If you’re looking for a mortgage, you want to do your due diligence before applying for a loan to ensure you get the best terms.
So what do lenders look for, and what are some steps you can take to put yourself in the best position possible for a loan with favorable terms?
Get a credit report from all three bureaus.
You may be thinking about your credit score, but easily just as important as the actual score is who keeps it. There are three credit bureaus: Experian, EquiFax, and TransUnion. These three credit bureaus are separate entities and operate independently of each other and, generally, do not share your account information with each other.
Your creditors may report to all three of the major credit bureaus or just one of them. Because of this, the information in your credit file may be different from one bureau to the next. When potential creditors and lenders check your credit, they may only pull one bureau’s credit report because that’s less expensive than viewing all three. In managing your credit, it’s important that you review your credit reports with all three of the credit bureaus.
You’re entitled to view your credit report and you can order a free credit report from each of the three major credit bureaus each year through AnnualCreditReport.com. You can also purchase a credit report directly from any of the credit bureaus at any time. It’s important to do this because your score may actually vary from one bureau to the next, and you want to be able to have a copy in your hand when the lender returns with an answer. They may be looking at just one, whereas the average between all three gives you a better rate.
It’s rare, but credit reports from multiple bureaus can help you in disputing inaccurate information in your credit report, which will affect your loan terms if it’s not detected.
Pay off your debts.
Lenders look for a variety of things when they decide whether or not they’re willing to take you on as a potential risk is how much debt you currently have. It could suggest two things: either you may not borrow responsibly by continually holding multiple debts and seeking more credit, or you may not have the resources to pay all of your bills should an emergency strike.
Those are both very real hypotheticals that lenders have seen before in real life. Lending money is what they do for a living, after all.
As a general rule, it’s wise to pay off any outstanding debt anyway before taking on more, but it’s doubly important when seeking a large loan for a mortgage. Take some time to pay off outstanding debts and you’ll be able to get better loan terms for yourself in the future.
Show as much in savings as possible.
Also known as “capital,” your savings will give the lender a clue as to how financially responsible you are and how much risk you’re likely to pose as a borrower.
Having a substantial amount of money in the bank makes you more appealing to a lender because they want to see that your assets are stored in liquid checking and savings accounts. The idea is that this tells them you can easily withdraw money to pay your mortgage bills if you need to. Investment and retirement accounts also count as assets, even if you can’t access them as easily.
Precisely how much you have in liquid assets is important, but how you manage them is a big deal to a lender as well. How you built and manage your assets gives them an idea of how financially responsible you are. Do you put money into savings each month, or are you making taxable withdrawals from your IRA here and there? If you’re accumulating these assets over a long period of time, this will show that you’ve been racking up reinforcements and are prepared for emergencies. That looks a whole lot better than a cash amount you just received in an inheritance.
The higher your credit, the better.
This one should go without saying, but it’s worth making clear. Creditors look for, understandably, the creditworthiness of borrowers, which is reflected in their credit score.
Raising your score isn’t something you do as a quick project over six months; ideally, you want to attain and then preserve a high score for your entire life. This means pay your bills on time, don’t spend more than you make, and use credit responsibly.
As it pertains to the rest of the tips in this article, think about it this way: if you check your credit score and feel like it needs to be higher, then take a year or two off your timeline for buying a home and work on building your score back up. While you’re at it, use that time to put money into savings, or move your bills to an auto-pay system on one credit card and pay that one bill on time each and every month.
If you have any outstanding debt, paying that down or paying it off entirely will go a long way towards bumping up your score. You can accomplish these things at the same time and the best part is they’ll all have the effect of raising your credit score and putting you in a better position to take out a loan when you’re ready.
For more perspectives on finance and real estate investment, check back with us each week as we post new blogs and be sure to sign up for our Priority Access List for advance listings and market updates. We’ll see you next week, and in the meantime, don’t forget that you can also keep up with us on Facebook and Twitter!
- Get It Right Solutions