One factor many people pay close attention to when getting a new mortgage is the interest rate. It makes sense. This number dictates how much your mortgage payment is each month. A higher rate means a higher payment. On a VA loan, it makes sense that the VA sets the interest rates, but they don’t. In fact, the VA does not play a huge role in the VA loan process. Everything is up to the lender you choose. This includes the chosen interest rate. Read on to learn more about how your interest rate is determined.
Different Lenders Offer Different Rates
You would think a VA loan has rates set in stone. That’s not the case, though. You can get quotes from three different lenders. Each of those lenders may quote you three different interest rates. Before you jump on the lowest one, though, you should learn how to compare loan offers.
The first rule of thumb is to shop around. You never know when one bank will look at your situation as risky while another doesn’t. Some banks charge discount points or origination fees. This way they can give their borrowers lower rates. Other banks that don’t charge these fees, may charge slightly higher rates. This doesn’t make one loan better than the other. It depends on your situation. The first step, though, is to get those quotes.
What’s Your Risk?
You may wonder why your neighbor was able to secure an interest rate lower than yours. You are both veterans and borrowed the same amount of money. It comes down to risk. How good is your credit? What does your past payment history look like? Do you have stable income? Have you changed jobs recently? These are all factors lenders evaluate. Let’s look at two examples:
- Joe has a 650 credit score. He has a debt ratio of 29/37 and he changed jobs within the last 3 months. Before his job change he was unemployed for a few months. He doesn’t have a lot of late payments on his credit report. He does have a lot of outstanding debt, though.
- John has a 700 credit score. He also has a debt ratio of 25/32. He has held the same job for the last 3 years with consistency. He has no late payments on his credit report. He also doesn’t have any credit card debt outstanding.
You can probably guess who would get the lower interest rate quote. In most cases, John would. That’s not to say Joe is a bad credit risk. He just has some factors that make him a little riskier. Joe might get an interest rate quote that is 0.5% higher than John’s. Some lenders may even give them the same rate, but charge Joe 2 points up front. This allows the lender to make the interest up front. In the event that Joe defaults on his loan, the lender still made money.
The VA Sets Guidelines
What the VA does set for VA approved lenders is guidelines. They have minimum requirements borrowers must meet. Beyond that, it is up to the lender what they want to accept. For example, VA loans allow credit scores as low as 620. Certain lenders may not approve a score this low, though. The lender can then add their own requirements.
The same is true for interest rates. The VA does not fund the loans, so they don’t play a role in the rate the lender charges. The VA guarantees the loan. As long as your loan meets their minimum guidelines, they will pay the lender back a portion of the money they lose if you default on your loan. The VA then takes over your loan, trying to recoup the money. They usually do this by selling the home as a foreclosed home.
How You Can Lower Your Interest Rate
So what are some good ways to ensure that you get a low interest rate? Try the following:
- Put money down on the home. Even the VA loans don’t require a down payment; you can still put money down. This decreases the risk for the lender. You have some of your own money invested in the home. This gives you more incentive to make your mortgage payments on time. Some lenders reward this with a lower interest rate.
- Keep your credit score as high as you can. The higher your score, often the lower the interest rate. Although other factors play a role, your credit score is a big factor.
- Keep your debts low. The VA doesn’t focus on debt ratios. Instead, they focus on discretionary income. This is the money you have left after you pay your bills. Either way, you need money that is not tied up in a monthly obligation. Low debts make this possible. This often helps you secure a lower rate.
Because the VA doesn’t set interest rates, you benefit from shopping around. If you have unique circumstances, this is especially important. Some lenders have higher thresholds for risk than others. Either way, you aren’t going to get one flat rate no matter where you go. Take your time and get different quotes. Ask lenders for a Loan Estimate too. This shows you the closing costs and the actual cost of the loan over its entirety. The APR is the number you want to pay close attention to anyways. Even if a loan has a lower interest rate, doesn’t mean it’s a better deal. If it costs you $10,000 in closing costs, your APR or annual percentage rate is likely sky high.
Take your time comparing offers and see what is available to you. Don’t jump at the first offer and don’t necessarily take the lowest one offered. Look closely at every aspect of the loan. Is it a term you are comfortable with? Do you have excessive closing costs? What is the overall cost of the loan? These are questions you should ask yourself before choosing the VA loan that is right for you.