It’s no secret; mortgage rates are at historic lows. Predictions that credit downgrade in the United States would send mortgage rates soaring haven’t come to pass and hopefully won’t.
So far, there is still a chance to get an incredibly low mortgage rate, whether buying a home or refinancing your current mortgage. However, before you get too excited, it’s important to understand some of the mortgage basics. Here are three mortgage myths you should not believe:
Myth #1: A good income means good loan terms — even if you’re self-employed
If you’re self-employed and have shopped around for a mortgage loan, then you know then that it’s far from easy to get a decent loan rate, no matter what your income. Some home buyers, who are self-employed, even have to go through an income audit in order to be approved.
Your 1099s simply aren’t as solid as a straightforward W-2. Additionally, those in the self-employed bracket tend to use as many tax deductions as legally possible — and that can skew what you actually make.
Further, even if you make a good living, if your debt to income ratio is high or if you have poor or even average credit, you might not get the lowest interest rate offered on the market.
Myth #2: Once you get approved, you’re set
Many people think that once they’re approved for a mortgage loan that they’re in the clear and don’t have to be concerned about their credit scores or what their finances look like. However, that isn’t the case. Many lenders will pull your credit again between the time of your approval and the loan closing.
Lenders could even check your credit score one more time just five days prior to the loan closing. If that happens and your credit score has taken a nosedive, then the financing could fall through at the last minute.
So, until the loan goes through, you want to avoid applying for new credit accounts or running up credit card balances. For the lowest mortgage rate, you need to keep your credit in the best possible shape throughout the entire loan process.
Myth #3: As long as you pass the 30 percent rule, you’ll be fine
While the 30 percent rule can be a useful guide to help you determine whether or not you can afford a mortgage, it doesn’t have much bearing on getting approved for a loan with the lowest mortgage rate.
An even safer bet is to use a 25 percent rule, and be sure to include all of your housing costs as they relate to your net income.
Many lenders, when deciding what mortgage rate to give you and even when approving you for a loan, use what is called the 28/36 qualifying ratio. This ratio looks at how much of your total income will go towards your monthly mortgage payment and how much will go towards debt payments.
To get the best rate, your mortgage should be no more than 28 percent of your monthly income each month, and your total monthly debt payments should not exceed 36 percent.