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- Historically low mortgage rates could make it a great time to buy a home, but you don't necessarily need to rush to take advantage of great rates.
- Mortgage rates should stay low well into 2021, if not longer.
- If you take the time to beef up your finances, a lender will likely give you a better mortgage rate.
- You should also shop for the right home and lender, which could take longer than you'd expect.
- Policygenius can help you compare homeowners insurance policies to find the right coverage for you, at the right price »
Mortgage rates are at all-time lows right now, with the average 30-year fixed rates at under 3%. Understandably, you don't want to miss out on such a great deal.
But if you aren't positive you're ready to buy a home right now, don't worry about missing out on a great rate. You probably have more time than you think.
Mat Ishbia, CEO of United Wholesale Mortgage, told Business Insider he thinks 30-year fixed mortgage rates will stay below 3% in 2021.
The Federal Reserve lowered the federal funds rate in 2020, and the Fed has discussed the keeping the rate low through 2023. The federal funds rate isn't the only thing that impacts mortgage rates, but it is one factor. A near-zero rate indicates mortgage rates could stay at rock bottom for a while longer.
Low rates typically signal a struggling economy, so as the US economy works to recover from the coronavirus pandemic, rates will likely stay low.
Now that you don't have to hurry to get a good rate, you have time to take care of three important steps in the homebuying process. Completing these tasks may take a little patience, but you'll be glad you dedicated the time.
1. Get your finances in shape
You may be completely ready to buy a home now, and that's fine. But you also might need more time to get everything in order.
"There's no reason to wait or rush," Ishbia said. "Just make sure you do it right."
Part of "doing it right" is looking at your finances and taking any necessary actions.
Lenders typically reward stronger financial profiles with lower interest rates. If you rush to buy a home when you still have a poor credit score, for example, you may not truly be taking advantage of today's low mortgage rates.
Here are some ways to improve your finances to land a better mortgage rate:
- Boost your credit score. The minimum credit score you need to buy a home depends on which type of mortgage you get. But having a score higher than the minimum can help you land a better rate. The most important factor in raising your score is making all your payments on time. You can also pay down debts and let your credit age. If you haven't looked at your credit report recently, request a copy and scan it for any errors that could be hurting your credit score.
- Lower your debt-to-income ratio. Your DTI ratio is the amount you pay toward debts each month, divided by your gross monthly income. Many lenders want to see a DTI ratio of 36% or less, but lowering your ratio can land you a better rate. Consider paying down debts more aggressively to lower your ratio, if possible.
- Save more for a down payment. Depending on which type of mortgage you want, you may not even need a down payment. Other types require up to 20%. But the more you can pay upfront, the better your interest rate should be. Because rates should stay low for a while, you may have time to save more before buying.
2. Find the right home
Don't be in such a rush to take advantage of great rates that you choose a home that just seems "good enough."
Do you want four bedrooms? How about a big garage or shed? Maybe you want a big, flat back yard. If you're hurrying to buy a home, you may compromise on things in the moment and end up regretting it later.
You should also find a neighborhood you like. The neighborhood you choose will affect how much you pay in homeowner's association fees. The area could also affect your property taxes.
3. Shop for the best mortgage lender
Finding your dream home and beefing up your finances aren't the only parts of buying a home that may take a little time. Ishbia also said you shouldn't rush to find the best lender.
And the best lender isn't the same for everyone.
"[United Wholesale Mortgage] isn't the right place for every loan," Ishbia said. "I might be the best place for a loan with a 740 FICO and 20% down. But Rocket Mortgage might be the best place for a borrower with a 640 FICO and 3% down."
There are several things to look for in a lender:
- Do they offer the type of mortgage you want?
- Do you qualify for a mortgage with this company?
- Does the lender offer you a low rate?
- How high are the lender's closing fees?
- Does the company provide good customer service?
You may take the time to apply for preapproval with several lenders to find the best deal. Or you could go through a mortgage broker, a middleman who sets you up with a lender based on your needs and wants for a mortgage.
You may be ready to buy a house tomorrow, and that's great. But if you aren't quite ready yet, don't worry. You should have plenty of time to improve your finances, shop for your dream home, and choose the best lender.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews.
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