How Debt-To-Income Ratio Or Net Worth Can Help Lower Your Mortgage Rate

Getting the Best Mortgage Rate When Refinancing

You might think that a mortgage borrower with $1 million in assets who is only spending 10% of their monthly income on their mortgage payment would qualify for a better mortgage rate than a borrower with $100 dollars in assets who is spending 50% of their monthly income on their mortgage. But you would be wrong: if they have the same credit score and both are borrowing the same percentage of their home's value, then they both get the same exact mortgage rates.

Assets Do Not Help You Get the Best Mortgage Rates

When a mortgage lender reviews a mortgage refinance loan for approval, assets are assessed by calculating what is called post-closing reserves. Simply put, post-closing reserves are your total assets after you have closed your loan and paid for any closing costs. Lenders take those assets and then divide by your monthly payment for your mortgage, taxes and insurance to determine how many months of post-closing reserves you have to cover you in case of emergency. The thinking is that the more months of reserves you have saved, the more likely you are to make all of your payments. For example, if your monthly housing payment is $2,000 per month and you have $20,000 in savings, then you have 10 months of reserve payments.

While the amount of reserves you have does affect whether or not you get approved for some loans, it simply has no impact on your mortgage rate. Mortgage lender rate sheets can have dozens of pricing adjustments for all sorts of issues - such as credit score, loan to value (LTV), property type etc - but the amount of assets you have is not one of these factors.

The amount of your monthly income that you spend on your housing payment is called your debt-to-income ratio. For example, if you make $5,000 per month and spend $2,000 per month on mortgage, taxes and insurance, then your debt-to-income ratio is 40% ($2,000 divided by $5,000). Most lenders like to see this ratio below 40% of your monthly income, with the thought that the lower your ratio, the easier it is for you to repay your loan. However, with good credit and a low loan to value, you can sometimes be approved to borrower as much as 50% of your gross monthly income on your housing payment.

Just as with assets, a better, lower debt to income ratio simply does not get you the lowest mortgage rates. Except for a small number of loan programs, the borrowers spending 10% of their monthly income on housing will get the same rates as someone spending 45%.

So What Does Get You the Best Mortgage Interest Rate?

It boils down to two factors: your credit score and your LTV (loan to value). The higher your credit score, the better your rate, with 740 scores or higher getting the best rates. The lower your loan-to-value, or LTV, the better your rate will be.

To find out the best mortgage rate you can get right now, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

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