Can You Negotiate Mortgage Rates?

How to Negotiate Mortgage Rates

While opening a new mortgage depends on a lender's approval, you're still in charge of finding the best deal for you. Comparing offers from multiple lenders and negotiating to secure a lower rate could help you save thousands of dollars over the life of your mortgage. Follow these steps to negotiate better mortgage rates.

1. Understand Your Financial Profile

Lenders are more likely to negotiate a lower mortgage rate if you're a highly qualified buyer. Before shopping for loans, make sure your credit is in good shape and meets standard lender requirements in a few key areas, including:

• Credit score: You'll need a credit score of 620 or higher to qualify for most conventional mortgages, but you may qualify for a government-backed loan with a lower score. Generally, the higher your credit score, the better your odds of obtaining a lower mortgage rate.
• Debt-to-income ratio (DTI): This measurement compares the amount of your gross monthly income to your monthly debt obligations. Most lenders want to see that your debt payments don't exceed 43% of your income, though some set the limit lower at 36%.
• Employment and income: Lenders want to see reliable employment and sufficient income to afford the monthly payments on a new home loan. Be prepared to show proof of income from recent pay stubs, income tax returns and account statements.

If your credit is lower than you'd prefer, you might consider pausing your loan efforts temporarily and taking steps to improve your credit before applying. Even a modest improvement in your credit score may help you secure a lower interest rate, potentially saving you tens of thousands of dollars over the life of your mortgage.

Learn more >> How to Build Credit to Buy a House

2. Get Quotes From Several Lenders

You might be able to nab a better rate from your preferred lender if you can show them a lower rate quote from a competing lender. That's why it's wise to collect quotes from multiple lenders to compare rates, terms and fees.

Remember, mortgage rates change daily, and it's a good idea to get quotes on or near the same day so you're comparing similar offers. You may receive a wider variety of options by applying at different types of financial institutions, including national commercial banks, local credit unions and online lenders. For example, one lender may waive origination fees while another may offer more loan types to choose from.

Learn more >> How to Shop for a Mortgage

3. Compare Overall Loan Costs

Review your loan estimates carefully to identify which lenders best suit your needs. Of course, snagging a low interest rate is a primary goal, but don't overlook lender fees that add to the overall cost of borrowing.

When shopping for rates, ask lenders about their interest rates but also about the fees and points they charge. Fees can vary widely between lenders. For example, some may charge a processing or application fee, while others may waive it altogether.

Comparing lender fees can be difficult since every lender sets their own terms and fees. That's where comparing annual percentage rates (APRs) among lenders can help. APR indicates both the interest rate and fees to give a more accurate picture of the total loan cost than merely comparing interest rates.

4. Negotiate With Your Preferred Lender

By this point, you should have a good idea of which lender offers the best combination of rates, terms and fees. If you want to negotiate a lower mortgage rate with your preferred lender, the most direct way is to simply ask, "Is that your best offer?" The worst that can happen is that the lender refuses to budge. On the other hand, they may concede to some wiggle room and lower the rate to seal the deal.

Another scenario is that the bank or mortgage lender you prefer doesn't offer the lowest rate. In that case, you may negotiate a lower mortgage rate by presenting them with a competitor's lower quote. They may either try to beat the rate or match it to secure your business.

Learn more >> Ways to Save Money on Your Mortgage

Can You Negotiate Mortgage Fees?

Negotiating a lower mortgage rate helps you reduce your monthly payments and the total loan cost over the loan's term. But when comparing loans, you should also factor in mortgage fees, such as origination fees and closing costs. While these fees don't impact your monthly payment, they can add to your upfront costs.

Negotiable Mortgage Fees

You may be able to negotiate lower fees the bank has control over, such as lender fees, points and the interest rate. Many lenders will reduce or eliminate certain negotiable mortgage fees to gain your business.

• Loan origination or underwriting fee: Lenders charge this fee to evaluate and process your mortgage loan. This fee usually ranges from 0.5% to 1.5% of the mortgage amount.
• Loan application fee: Lenders often charge a fee to review your mortgage application. If your loan includes this fee, ask them to waive it. Many lenders are willing to reduce or remove the fee, especially if you already have a relationship with them.
• Title insurance: Your lender will likely require you to buy title insurance to cover any expenses arising from any disputes during the title transfer. Rates vary among insurance providers, so shop multiple carriers to find the lowest rate.
• Home insurance premium: Like title insurance, you'll also need to take out a homeowners insurance as a condition of the mortgage loan. Shop around for a policy that meets your coverage needs at the lowest rate.
• Rate lock fee: Remember, mortgage rates are constantly in flux. Any rate quote you receive can change at any time. However, you can pay a negotiable rate lock fee to secure your rate for 30, 45 or 60 days to ensure it remains the same through your closing date.
• Real estate agent commission: Agent commissions traditionally fall between 5% and 6%, which is usually paid by the seller. However, this is a negotiable fee, so you can often secure a lower commission.

Non-negotiable Mortgage Fees

Unfortunately, you'll have to pay for several non-negotiable expenses when you take out a new mortgage loan, such as:

• Inspection and appraisal fees: Since you're generally not obligated to use a specific inspection or appraisal service provider, you may lower your costs by comparing several quotes.
• Mortgage insurance: You may have to pay mortgage insurance depending on the type of loan you're applying for. For example, you may have to pay for private mortgage insurance (PMI) if you take out a conventional loan with a down payment of less than 20% of the home's purchase price.
• Government fees: You can't negotiate fees set by your city or county, such as recording and title transfer fees.
• Property taxes: Similarly, property tax rates are non-negotiable as they are set by your local and state government authorities.
• Credit report fee: The purpose of this fee is to pay for the cost of accessing your credit report and score to review your creditworthiness. The fee is typically non-refundable.

Learn more >> Everything You Need to Know About Mortgage Fees

Get Your Credit Ready to Negotiate Your Mortgage

Positioning yourself as a low-risk, creditworthy borrower may help you gain leverage to negotiate a lower mortgage. Lenders may be more likely to negotiate if they trust you'll repay the loan as agreed.

If you're planning to apply for a mortgage soon, take action to improve your credit as well as your ability to negotiate for a lower rate. Here are some actionable steps to get your credit ready for the process.

• Make all payments on time. Your payment history accounts for 35% of your FICO^® Score^☉ , the credit score used by 90% of top lenders. Bringing all your debt accounts current and consistently making payments before their due dates may have the greatest impact on your credit score.
• Pay down credit card balances. Lowering your credit utilization rate may also positively affect your credit score. This ratio measures the amount of your total available credit you're using, and it makes up 30% of your credit score. Generally, borrowers with lower credit utilization ratios tend to have higher credit scores. Those with average credit scores of 800 or above typically have credit utilization ratios averaging 6.5%, according to Experian.
• Request credit line Increases. Raising your credit limit without increasing your debt may lower your credit utilization ratio. Let's say you have a $3,000 balance on a credit card with a $5,000 limit. In this case, your credit utilization is 60%. If your card issuer increases your credit line to $10,000, your $3,000 balance would now represent a 30% credit utilization ratio, which could boost your score.
• Consider debt consolidation. Paying off high-interest credit card debt with a debt consolidation loan may help your credit score by reducing your utilization on revolving credit. And since personal loans typically have lower interest rates than credit cards, you could eliminate your debt faster. Just be sure to do this six months or more before you plan to apply for a mortgage.
• Minimize new credit applications. When you apply for new credit, the lender or creditor typically runs a hard inquiry on your credit, which can cause a temporary dip in your credit score. It's also usually not a good idea to open new credit accounts around the time you apply for a mortgage, as it could increase your DTI or raise a red flag to lenders that you're financially strapped.
• Don't close old accounts. It may be tempting to close a credit card account with a zero balance or one you don't use. However, closing the account may increase your credit utilization rate, which could hurt your score. Keeping the account open may prevent an unnecessary credit score drop and potentially affect the mortgage rate you receive.

Learn more >> What Credit Score Do I Need to Buy a House?

Negotiating a Better Mortgage Rate Starts With Your Credit

Financial institutions often offer favorable mortgage rates and terms if you have strong credit and meet their other financial criteria. The same goes for negotiating lower loan rates. Lenders are more likely to make concessions to earn your business if your credit profile proves you're a trustworthy borrower.

Before applying for a new mortgage, access your Experian credit report and FICO^® Score for free to see what lenders see. Follow the steps above to improve your credit quickly. And remember, you have the right to dispute any erroneous or inaccurate information you spot on your credit report.