How to Get the Lowest Interest Rate on a Mortgage Loan

Summary: In this article, we will discuss how to get the lowest interest rate on a mortgage loan in the 2010 economy. This article is intended for first-time home buyers in the United States.

Over the last few years, there have been some key changes within the mortgage industry. We have witnessed a nationwide housing collapse, a foreclosure crisis, an economic recession, and some new regulations on the lending industry. So, if you want to secure a low rate on a mortgage loan in the "new economy," there are certain things you need to know. Here's what you should know about credit scores, down payments and mortgage points:

Credit Score Needed to Get the Lowest Rate

The first thing we need to talk about is your credit score. This is one of the key factors that determine whether or not you qualify for the lowest interest rates available. It's also something that varies from one lender to the next.

When creating this article, we visited more than a dozen lender websites to get a sense of what they were looking for, in terms of borrower qualifications. We also solicited input from a few industry contacts. Here's what we learned. If you want to get the lowest rate possible on your mortgage loan, you'll probably need a FICO credit score of 760 or higher. Some lenders will require a 780 or higher. So it partly depends on the particular company you're dealing with.

In the past, prior to the 2008 - 2009 recession, it was possible to quality for the best rates with a score of 720 or higher. That was the general rule used by most lenders. But like most lending requirements, that "rule" changed after the mortgage and housing crisis. Here's the bottom line. If your score is below 760, you probably won't get the lowest interest rates the lender has to offer.

Fortunately, there is plenty you can do to improve your score. If you don't have any serious damage to your credit (i.e., foreclosure, bankruptcy, or a history of missed payments), then you could achieve a FICO score of 760 within a year's time -- maybe less.   

The Down Payment Factor

You'll also have to make a significant down payment on the home, if you want to qualify for the best mortgage rates available. The days of zero-down home loans are gone. Today, lenders want buyers to have more "skin in the game," so to speak. So they require a certain level of down payment. How does this translate into dollars? Well, if you want to get the lowest interest rates on a mortgage loan in 2010, you'll probably have to make a down payment of 20%.

You can qualify for a loan with less money down. FHA loans, for example, only require 3.5% down). But you'll probably have to put 20% down to get the best rates. Of course, there's another benefit to this as well. By putting more money down up front, you'll have more equity in the home from day one. This is a sound investment strategy.

Buying Points to Get a Low Rate

So we've talked about your credit score and the size of your down payment. These are two key factors that will help you get the lowest mortgage rates from lenders. But there's another factor we need to discuss -- points. A mortgage point (also referred to as an interest or discount point) is one percent of the loan amount. It's a type of pre-paid interest. Instead of paying it over the life of the loan, you would pay it up front during the closing process. By paying points at closing, you can often secure a lower rate on the loan.

In 2010, some lenders will only offer their best rates to borrowers who pay for points in advance. Notice I said "some" lenders. Not all of them require this sort of thing.

Shopping Around for the Best Deal

Here's another secret of the mortgage industry that may surprise you. One lender may only consider you a "prime" borrower, while another lender puts you into their "super prime" category. Translation: Some lenders will be willing to offer you the lowest interest rates they have, while others will not. Even if your qualification criteria are the same from one application to the next, the end results may vary. This is why it pays to shop around.

My advice is to get offers from at least three different lenders, before making any decisions. Be sure to include local banks and credit unions in this process. In some cases, you can get a lower rate from a small bank than a larger / national bank. It certainly doesn't hurt to ask.

Some people think it damages your credit score to apply with different lenders like this, but that's not the case. The people who created the FICO credit scoring model know that consumers will shop around for the best rates, so they've built this allowance into the scoring system. In other words, it's highly unlikely that you'll damage your credit score by getting a handful of quotes.

This article explains how to get the lowest interest rate on a mortgage loan, in the 2010 economy. If you have other questions about this topic, be sure to use the search tool at the top of the website. There are hundreds of mortgage-related articles on this website, so you're bound to find the information you seek.