Q: Marsha, my wife and I just started our home purchasing process. I know we need to get preapproved for a mortgage loan. When I ask loan agents the rate I can expect, they hesitate to give me a quote. Is this typical? Why can’t I receive a direct answer?
A: Honest lenders answer will your question “What will my interest rate be?” with “I need more information about you and your situation.” They are not trying to draw you in with an unrealistic quote. The problem is there are so many unrealistic interest rates advertised that the public is rightly confused. The daily quoted interest rate is a general assessment of our country’s current financial environment and not the rate that most people will get.
Before a mortgage lender can arrive at a realistic interest rate for you specifically, there are three important numbers that they need to know about you and the home you want to purchase.
The first is called Debt to Income (DTI). This is the ratio of your total debt to your income. The lender needs to know the total monthly costs you will have if you purchase the home, including the principal, interest, property taxes and insurance (PITI). Your total debt includes PITI and all other debts and obligations you pay every month. Using your gross monthly income and your monthly debt obligation, the lender will calculate the Debt-to-Income ratio.
For example: If the home’s PITI is $2,200, plus you have a car loan for $500, a credit card payment for $450, and an alimony payment for $450, then you have a total monthly debt obligation of $3,600. If your gross monthly income is $9,500, then the DTI ratio is 3600/9500, or 37 percent. This is a perfectly acceptable DTI, and your interest rate will be affected positively. There are lenders that will allow a DTI of up to 50 percent or even more.
As your DTI goes up, you will pay a higher interest rate because with less money left over after your monthly debts are paid, the more likely you are to default on the loan.
The next important ratio is the Loan to Value, or LTV. This concerns the value of the house you’ve chosen and the amount that you’ll use for a down payment. For example, if the home appraises for $500,000 and you will put down 20 percent, or $100,000, then your loan will be for $400,000. Your LTV would be 400,000/500,000, or 80 percent. This is the traditional LTV, but today there are many loan programs that will accept 10 percent down or less. You pay for this option with a higher interest rate. Many buyers opt to do this.
The final number that affects your interest rate is the Fair-Isaac Company number, or FICO, also known as your credit score. Your FICO score is based on your financial history. A FICO of 740 or more will set you up for the best interest rate. Buyers with a FICO score as low as 540 will still be able to obtain a loan, but it will cost them. The more risk for the lender, the higher the rate.
I hope this explanation gives you a clearer understanding of why there is always a range of interest rates at any given time. Individual rates can vary significantly from what you might see in the financial news.
Marsha Gray has worked in Santa Barbara real estate for more than 25 years. She has expanded her knowledge into all aspects of the real estate market. At Sun Coast Real Estate, she serves her clients’ real estate and finance needs. To read more of Marsha’s Q&A articles, visit marshagraysbhomes.com. Contact Marsha at (805) 252-7093 or marshagraysb@gmail.com. DRE# 012102130; NMLS #1982164.
