How to Get the Best Rates on a Conventional Loan

Jun 30, 2023 | Mortgage Guides

Securing the Best Deal: Tips for Getting Top Rates on Conventional Loans

Conventional home loans are mortgages that a government agency does not insure. Conventional mortgages are popular because of the relaxed eligibility requirements and reasonable interest rates. 

This guide will cover the qualifications needed for a conventional loan, how mortgage interest rates work, and tips on securing the best rates possible for borrowers.

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Understanding Conventional Loans

There are five crucial components to understanding conventional mortgages: 

  • Down payment
  • Interest
  • Principal 
  • Mortgage type
  • Loan term

Down Payments

The down payment is the upfront cash the homebuyer provides. It can sometimes be as low as 3.5% but is often closer to 20% of the amount borrowed. The down payment builds equity in the property and provides collateral. A higher down payment will yield better interest rates.

Interest Rate and APR

The interest rate is what the lender charges the homeowner to borrow the money. Also known as the mortgage rate, interest is a percentage of the amount charged monthly. The annual percentage rate (APR) accounts for the mortgage interest rate along with additional charges such as closing costs, which is why this percentage will be slightly higher.

Principal

The principal is the amount borrowed. It will be paid back with the interest. The principal is the cost of the house minus the down payment. The more the principal the homeowner pays off, the higher their equity.

Mortgage Type

There are two mortgage types of conventional loans: adjustable-rate (ARM) and fixed-rate (FRM). This refers to the way in which the interest is charged. The interest rate will be adjusted periodically for an adjustable-rate mortgage. The rate will never change from the initial agreed-upon rate for a fixed-rate loan.

Loan Term

The loan term is the life of the mortgage. It refers to the time it will take to repay the loan. A conventional home loan is often either a fifteen-year or thirty-year term. While ten-year and twenty-year loan terms exist, they are uncommon.

How to Qualify for a Conventional Loan

Qualifying for a conventional loan is about proving to the lenders that the mortgage is a secure investment. This is shown through credit reports, financial history, income, DTI, and down payment. 

Credit score

A credit score of 620 or higher is required to qualify for a conventional mortgage. This shows the lender that the borrower has a strong history of timely debt repayment.

Financial History

Lenders will need proof of a stable financial history. This may include reviewing tax returns, pay stubs, and employment records. This process will prove that the homebuyer is unlikely to default due to crises. 

Income

The income of the potential borrower is also relevant to the creditors. Making sure that the mortgage will not burden the homebuyer is a crucial aspect of securing the investment.

DTI

Debt-to-income ratio (DTI) is another tool lenders use to ensure they will not overwhelm the borrower with a monthly payment that is too high. DTI refers to the percentile of the borrower’s income spent on debt payments. Lenders look for a DTI below 45%; the lower, the better.

Down Payment

The down payment is another qualification. As mentioned above, a higher down payment means that even if the loan defaults, the lender will be in a secure position. 

Understanding Mortgage Rates

Mortgage rates are where lenders earn profits. Even with the best qualifications, a lender will not give a mortgage away. The amount of interest, however, is determined by several factors. 

The property’s size, the buyer’s qualifications, and the current market all impact the interest. Besides providing a profit, the mortgage rate also provides more security. This is why less qualified buyers have higher rates; it is a high-risk, high-reward situation for the lender. 

How to Shop and Compare Mortgage Rates

The simplest way to assess different lenders is through online research. Look up the lenders with the best rates for your area. 

From there, list three to five creditors and ask them about their mortgage rates,  and then decide between your top picks.

How to Get the Best Rates on a Conventional Loan | Wesley Mortgage

8 Tips on Finding the Best Rates on a Conventional Loan

Having low rates on a home loan saves money in the long run while also saving money in the short term by lowering payments. Sometimes, finding the best interest rates may be challenging, so below are eight tips.

Tip #1 Improve your Credit Score

Without a doubt, a high credit score means a better interest rate. While 620 is the minimum score to qualify for a conventional loan, a few more points on a credit score will make giving you a good interest rate more appealing to lenders.

Tip #2 Have a Large Down Payment

Having a down payment of 20% means lower interest rates. A big down payment lowers interest rates because it offers more security for the lender but also gives you better rates because less money is being borrowed.

Tip #3 Shop around

Check with multiple lenders to see what the competition offers. Shopping for a better credit rate may yield promising results or give you the comfort of knowing you have the best rate.

Tip #4 Consider Local Creditors

Small banks, firms, and local lenders often offer a more competitive rate than their big bank counterparts. Shopping locally may mean having a better mortgage rate.

Tip #5 Lower your DTI

Having a DTI above 45% will disqualify you from most home loans. The lower the DTI, the less likely a default. Anything you can do to reduce your current payments may mean a better interest rate on a conventional loan.

Tip #6 Look at Different Loan Terms

If you qualify, a lower loan term means better interest rates. While a thirty-year loan has lower monthly payments, a fifteen-year loan means lower interest, even if more is paid monthly.

Tip #7 Stable Income

Having proof of a stable income means better rates. The higher the income, the less likely you are to default. A steady income history is another plus, showing lenders that the earnings will not be lowered.

Tip #8 Lock-in Rates

Securing low rates is one issue; keeping them is another. It does not matter if you get a low rate if it will skyrocket in a few years. This is why a fixed-rate loan may secure the best rates in the long term. It is essential to lock in reasonable rates once they have been obtained. 

Use a Mortgage Calculator

Using an online mortgage calculator can help you get a better understanding of mortgage rates and costs. Try ours at https://www.wesleymortgage.com/calculators

Summary

Securing the best rate for a mortgage is a priority for most homebuyers. Following these eight tips will ensure you get the lowest possible rates. Using a calculator and raising your creditworthiness are great places to start.

Click here to learn more about conventional loans, or click the link below to start the journey of buying a new home. We at Wesley Mortgage are here to help you through this life-changing process!

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