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HOME LOANS

Several factors influence where mortgage rates trend over time, including the U.S. Federal Reserve’s asset purchases, housing demand and the secondary market for mortgage-backed securities. But the largest driver of getting the best mortgage rate is still in your control.
 

How do you qualify for the lowest mortgage interest rate? Lenders decide if you’re a good risk for their money. The lower the risk, the better the rate. They’ll study your income, credit score, employment history, liquid assets, down payment, the type of property you’re buying, and its value.
 

• Know Your Credit score

Your credit score is the foundation for your personal financial profile. The most commonly used score is issued by Fair Isaac Corp. (FICO), and grades you in five different areas, each making up a percentage of your grade. Credit scores range from 300 to 900; FICO’s are between 400 and 800. The best mortgage rates today go to borrowers in the high 700s and above. The best candidates have low credit card and loan balances, and long histories of on-time payments and ongoing credit accounts, so make sure your credit report is error-free.

• Get Out Of Debt

Too much debt makes you a bad risk. Lenders look at your debt-to-income ratio (DTI), which should be less than 43%, to determine if you’ll qualify for the best current interest rate. Lower your DTI by paying down your plastic. This will most likely raise your FICO score, as well.

• Think about Mortgage Rate Locks and Points

After years of low numbers, current interest rates are expected to climb as the Federal Reserve slows down the pace of the economic stimulus. A rate lock makes the mortgage lender commit to holding an interest rate for you for a specified period of time. This guarantees you will get the rate you saw at application time, even though your loan hasn’t closed.
 

Choose a Mortgage
 

Your choice of mortgage will be dictated by your goals and your resources. It’s important to compare different types of home loans. Your choices — government or private, fixed or adjustable, 15- or 30-year term — depend on your goals and the strengths and weaknesses of your application.

Home buyers who don’t have a lot of cash should first look for a government-backed mortgage that allows a small down payment, or a community mortgage from Fannie Mae or Freddie Mac. Examples include the FHA loan, insured by the Federal Housing Administration, VA loan, guaranteed by the U.S. Department of Veterans Affairs, and USDA loan, backed by the U.S. Department of Agriculture, My Community Mortgage, from Fannie Mae, and Home Possible from Freddie Mac.

The FHA loan allows a down payment as low as 3.5 percent of the home’s purchase price. The VA loan and USDA loan can be used to buy a home with no down payment at all. Community home loans require three percent down and have lower mortgage insurance premiums, but they are restricted to people whose income falls in the low-to-moderate range.
 

Buyers who have a bit more cash should consider a conforming loan from Fannie Mae or Freddie Mac. Fannie and Freddie are corporations that have been controlled by the federal government since falling into financial trouble a few years ago. They purchase loans that conform to their guidelines (hence the term “conforming loans”) from lenders. These loans are available with a down payment as small as five percent (three percent for community mortgages) of the home’s purchase price.

There are size limits to the above-mentioned loans, and other government-created guidelines that borrowers must meet. Those who want to purchase more expensive properties or choose loans with non-standard features can select jumbo or non-conforming loans. These are sold by private lenders that create their own guidelines.
 

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