The coronavirus pandemic has made a huge dent in the U.S. economy, but mortgage interest rates are at an all-time low. It’s no surprise then that in 2020, existing-home sales hit their highest level since 2006, according to the National Association of Realtors.
That said, because of the economic downturn, many home lenders have tightened their underwriting criteria, showing some caution about who they’re willing to lend to. So, even if you meet the minimum requirements to get a mortgage, it may still be tough to qualify.
If you’re hoping to buy a new home or even refinance your existing mortgage loan, here are four things you can do to increase your chances of getting approved.
Check your credit score and report
Shop around and compare mortgage lenders
Pay down debt
Avoid taking on new debt
1. Check your credit score and report
Your credit score is a key indicator of your overall credit health. Use a free service like Experian or Discover Credit Scorecard to get free access to your FICO credit score, which is widely used by lenders — you may even already get free access through your bank or lender.
Due to the pandemic, the three national credit bureaus are offering one free credit report per week through April 2021 — normally, you can only get a free credit report from each bureau once every 12 months. Visit AnnualCreditReport.com to get your copy.
If you're confident in your credit score, then you can plug in some of your information into Credible's free online tool to find out what kind of mortgage rates you qualify for today.
If you have bad credit, you should research ways to boost your credit score ASAP. Improving your credit score doesn't have to be a difficult task. Here are some simple ways to improve:
Pay bills on time
Get caught up on past-due payments
Pay down credit card balances
Keep a low balance
Dispute any errors or inaccurate information on your credit card report
2. Shop around and compare mortgage lenders
Each lender is different, not only in how they underwrite mortgage applications but also in how they assign interest rates. So, while one lender may reject your application, another may be more than willing to finance your home purchase.
The more mortgage lenders you compare, the better your chances of finding one or more lenders who will work with you. You’ll also improve your odds of getting the lowest interest rate that’s available to you.
Filling out applications with multiple lenders can be time-consuming, so consider using an online marketplace like Credible to shop around and compare offers from multiple lenders in one place.
3. Pay down debt
While your credit score is a key indicator of whether you qualify for a mortgage, another crucial element is your debt-to-income ratio (DTI), or the percentage of your monthly gross income that goes toward debt payments.
Many mortgage lenders prefer that your total DTI stay below 36%, and your front-end DTI, which only includes housing costs, to be no more than 28%. While some may go higher than those thresholds, the lower your ratio is, the better.
To maximize your efforts, focus on loans and credit cards with the lowest balances that you can pay off quickly. Even a small reduction in your DTI could make a huge difference.
4. Avoid taking on new debt
A mortgage loan is a major financial commitment, both for you and the lender, so it’s natural for lenders to be sensitive to other debts that could make it difficult for you to keep up with your monthly payments. As you get your credit mortgage-ready, apply for a loan, and go through the home buying or refinancing process, it’s critical to avoid applying for other credit accounts.
If you expect to need a loan or credit card, complete that process six or more months before you submit your mortgage application.
What are today’s mortgage rates?
Mortgage rates have dropped significantly in 2020, but between August and September, they’ve remained somewhat flat. Unlike shorter-term loans, mortgage rates don’t have a strong tie to the prime rate or federal funds rate.
However, they are influenced by 10-year Treasury Notes and inflation rates, both of which have been relatively low in 2020. Here are the latest average mortgage interest rates for the week of Oct. 8, according to Freddie Mac:
30-year fixed-rate mortgages: 2.87%
15-year fixed-rate mortgages: 2.37%
5/1 adjustable-rate mortgages: 2.89%
Based on the current mortgage and refinance rates, it may be a good time for you to refinance. To see how much you could save on monthly payments today, crunch the numbers and compare loan rates and mortgage lenders using Credible's free online tool.
The bottom line
If you’ve been thinking about buying a home or refinancing your mortgage loan, now is an excellent time to do it. There are even options with a low down payment if you don’t have a sizable savings account balance — though a lower down payment may result in private mortgage insurance.
Before you submit your mortgage application, however, it’s important to make sure you’re a good candidate for a loan. If you have bad credit, existing debts or more —make sure you do the above to improve your odds of getting approved. Check your credit score and work on paying down credit cards and other low-balance debts.
Also, make sure to avoid new credit applications several months before you file a mortgage application, as well as during the homebuying process. And to ensure that you get the best rate available, visit Credible to shop around. You can also get in touch with experienced loan officers and get all of your mortgage questions answered.