If you are a veteran, you may have access to the flexible VA mortgage loan program. Just like any borrower, you probably want to know what affects your interest rate. Most borrowers want the lowest rate possible, as that keeps the payment down and the cost of the loan over its lifetime lower.
So how do you get the lowest rate available? You have to maximize your qualifying factors. Below we discuss the factors that lenders pay the most attention to when determining your interest rate.
How Risky Are You?
Lenders for most loan programs use what’s called risk-based pricing. They have a base interest rate they charge ‘perfect’ borrowers. From there, they make adjustments for each risk factor you provide them. For example, if you have a low credit score, you are a high risk. Lenders may increase your interest rate to make up for that risk. The fewer risky factors you possess, the better your chances of securing a low interest rate become.
Your Credit Score
As we mentioned above, your credit score is an important factor. In fact, it’s one of the first things lenders look at when approving you for a loan. They want borrowers that have a good credit history. That credit score that you possess shows lenders your financial responsibility. VA lenders typically want a credit score no lower than 620, but higher scores can help you secure that low interest rate that you want.
In addition to your credit score, lenders will evaluate your credit history. They’ll look over the last few years and determine if you pay your bills on time and if you use your available credit wisely. The better your credit history is, the better the interest rate a lender may provide.
Your Debt Ratio
The VA doesn’t have strict debt ratios you must meet, but lenders often impose certain guidelines. In general, the lower your debt ratio is, the higher your chances of a low interest rate become. Your debt ratio shows lenders the portion of your monthly income that is spoken for and how much is left for daily living and/or saving.
In general, a low debt ratio equals a lower risk of default. That’s what lenders want to see. They don’t want to worry that you are going to get in over your head and be unable to afford your mortgage payments.
Your Employment Stability
In general, lenders like to see you at the same job for the last two years. This shows stability and reliability. The longer you are at the same job, the less risk you pose to the lender. Compare this to a borrower that hops from job to job every few months. There’s no reliability or consistency in this borrowers’ income and employment. Lenders don’t know from one day to the next if you will be employed, which translates into a high risk and high interest rate (if you are approved).
Your Down Payment
VA loans don’t require a down payment. You can borrow up to 100% of the purchase price of the home with this program. That doesn’t mean you have to borrow that much, though. You can make a down payment and show the lender that you have a vested interest in the home. With the lower loan amount, lenders take a lower risk. This may mean that you can secure a lower interest rate as a result.
Finding the Lowest Interest Rate
Once you’ve maximized your qualifying factors, your next step in securing the lowest interest rate is to shop around with different lenders. There are many VA lenders you can use both in your area and around the country. Find out what rates different lenders will offer to see if you can save money by choosing the lender with the lowest interest rate.
The best thing you can do is make sure your credit is in good standing, have stable employment, keep your debt ratio low, and have savings to help you make a downpayment. With these good qualifying factors, you should be able to get the lowest rate on your VA loan.