So you’ve finally found the home of your dreams, submitted an offer and the seller has accepted. Now comes the tricky part—getting your loan to go through. From offer to close of escrow, the home-buying process can be tedious at best, especially if your interest rate has changed.
How does a lender determine the interest rate on a mortgage?
In most instances, a pre-approval letter is needed from your lender prior to submitting an offer on a house. This letter will contain information such as the property address and the amount you can finance for it. It doesn’t always, however, provide the interest rate you’ll be paying to borrow those funds. Your lender will normally give an approximation of this number as you begin to discuss your financing options.
Your interest rate is determined by a number of factors that depend on your financial portfolio as a borrower, such as:
Assets and Liabilities
Unpaid Debts or Bankruptcies
These factors allow a lender to determine how worthy or risky a borrower is. A lower interest rate is obviously more desirable, but can be difficult to obtain if you have an untraditional employment background, loss of income, poor credit or past unpaid debts.
Is my interest rate set in stone?
Once you’ve received your pre-approval letter and found the house you want to buy, you’ll need to submit an offer outlining how much you want to pay for the house and where you’ll be receiving the financing. In addition to the purchase price, this offer will contain lender-supplied information such as the type of loan you’ll be using, the length of the loan and the interest rate at which you’ll pay it back. Depending on how much time has passed since you received your pre-approval, your interest rate may change, especially if your financial portfolio has changed. If the lender has uncovered a past unpaid debt not immediately noticeable on your credit report, or you’ve had a recent loss of income, you may find that your interest rate has gone up. If it’s a small increase that you can live with, great. You’ll sign the offer papers and move into underwriting.
What if my interest rate changes after we’ve gone to underwriting?
Underwriting is the process where the lender requests and reviews detailed financial information from the buyer/borrower. They review your information tooth and nail to ensure that you’re a desirable candidate for the loan you’re applying for. It may happen that the lender overlooked or missed a critical flaw in your portfolio earlier in the pre-approval or offer submission process that is eventually unearthed in the underwriting process. This can be devastating for buyers, as they may now become unqualified for their loan with only weeks to close. Many times in this situation, the lender will have an alternative loan in place. However, the interest rate or loan terms may be unreasonable or undesirable for the buyer. If this is the case, the buyer may try their luck with another lender, while facing a delayed close on the home and risking discontent with the seller. Depending on how quickly the buyer finds alternative financing, he or she may be able to close on a home before the seller begins negotiating with another buyer.
Advice for Buyers Selecting a Mortgage Lender
Real estate agent and buyer advocate Olja Mihic offers the following advice for buyers selecting a mortgage lender:
- Research your lender. Have other buyers in a similar situation had success using this lender? Are they reputable and professional? Are they quick to respond to your needs?
- Ask questions and supply all information up front. Be honest with your lender about your financial situation. Ask questions such as, “Why might my loan not go through?” Lenders are sales people and want your business, often at the risk of prematurely accepting you as a client.
- Have a backup lender in place. If you have any doubt that your loan may not go through, have a backup lender in place in the event you need to make a quick switch during the underwriting process.
Loan terms and interest rates can change at any time, but following a few best practices can help ensure your financing will go through and you can close on your dream home without a skip or hiccup.