Here's all you need to know about negotiating and locking rates on VA mortgages.
How do VA loan rates work?
There are a number of factors that will determine your VA loan rate. Among them are:
Credit score - Your VA loan rate will be lower if you have a good credit score.
How quick you've been to repay loans in the past - You can get a lower interest rate with a good repayment history.
Duration of loan - If you want to sit with the loan for longer, you assume higher rates. the rate on a 15-year VA loan is lower than on a 30-year VA loan
- Loan Type - Is it an adjustable-rate mortgage (ARM), a fixed-rate mortgage, refinance loan, or a larger jumbo loan?
While these factors definitely determine how much interest you will pay on your loan, there're still things you can do to lock down a desirable rate from the start. Here's a look:
Negotiating VA rates
Many Americans are unaware they can negotiate their VA loan rate. It's actually quite possible. To get the best deal, you should shop around for multiple quotes. But there is a lot more to it than talking about percentage points.
How does negotiating VA rates work?
In the past, mortgages were less regulated. That meant people who worked for commissions, e.g., loan officers and mortgage brokers, could exploit the system to maximize their income. They would discriminate between customers by offering different rates or closing costs to increase their income.
When the government realized lenders were discriminating between customers, it introduced regulations that prevented brokers from profiting from the borrowers' fees. Loan officers were to earn the same commission irrespective of the interest rate or fees they imposed on their clients. As a result, banks ceased negotiating.
Of course, this changed the way borrowers can get better deals on mortgages. Mortgage lenders could no longer negotiate if it led to discrimination. So that means borrowers were left with only a few strategies for negotiating lower VA loan rates before locking. These are as follows:
- Getting multiple offers from different lenders
- Requesting your lender to match a lower rate
- Using discount points to negotiate for a lower rate
- Strengthening one's mortgage application
Shopping around for a lower VA rate
You do not have to take a loan from the first lender that gives you the lowest interest rate. Different lenders offer different mortgage rates; shop around for better deals. Plus, don't be duped by low upfront rates, factor in fees, pints, and closing costs. You want to compare the overall deal among different lenders and see who has the lowest overall cost.
Ask your bank to match a lower mortgage rate offer
Getting multiple deals strengthens your negotiating position. If you can show that you were offered a lower VA loan rate by a different lender on the same loan application, you'll have a far better chance of negotiating successfully.
Almost half of all homebuyers abandon their search after receiving only one VA loan rate quote. However, studies suggest that obtaining just one more quotation can save you $1,500, and getting five quotes can save you $3,000 on average. Simply have the agreements in writing so you can back up your claims when negotiating with lenders.
Using discount points to negotiate a better mortgage rate
Many lenders also offer the option of purchasing discount points. By investing in discount points, you can lower your mortgage rate permanently or for some time. A discount point equals 1% of a home's value — so you would pay $7,500 for one discount point on a $350,000 loan. Lenders determine how much a point lowers their rates.
Getting discount points is a wise thing to do if you plan on staying in the house for many years. That's because it takes longer for you to start feeling their advantages. However, find out in advance if the cost of the discount points is included in your loan rate and if that's okay with you.
Boost your mortgage application
How can you make your mortgage application stronger? By enhancing your financial situation. Obviously, a solid financial standing leads to lower rates because of the reduced risk of default. Generally, when it comes to VA loans, lenders offer lower rates to applicants whose credit scores are above 620 and whose debt-to-income ratio is below 42%. There are things you can do to improve your credit score and DTI.
- Pay your bill on time.
- Reducing your collection accounts
- Keeping an eye on your credit reports and reporting any errors or possible fraud
- Reducing or eliminating part or all of your outstanding debt
- Retaining your accounts open for a long credit history
- Working to earn more
You can also get a better rate by putting down a larger downpayment. It reduces your debt obligation to the lender and the risk they have to shoulder.
Lock in a VA loan rate?
After finding a desirable VA loan rate, lock it in. A rate lock guarantees that your VA loan rate will not increase during the period specified by your lender. Interest rates frequently fluctuate, even throughout the day.
You want to keep the quoted rate; otherwise, why did you work so hard to get it in the first place? Having the VA loan rate locked ensures you won't be subject to rate revisions even if interest rates change before you close the deal.
Getting a mortgage loan is one of the most significant financial decisions you'll ever make, so if you can, keep your costs low, that'll be great. While existing regulations make it hard to negotiate when it could lead to unfair treatment of other borrowers, you can shop around for better deals, ask your preferred lender to match a lower rate, or even use discount points to reduce your VA loan rate.