As you start the process of obtaining a U.S. Department of Veterans Affairs (VA) loan, you may be wondering (like most other borrowers) how to find the most favorable interest rate for your situation.
Interest rates for any mortgage can significantly affect your monthly payments, so it’s no surprise that most borrowers end up shopping around for lenders. What you may not know is that there are many factors that affect mortgage interest rates—not just which lender you work with.
Understanding these variables is key to helping you navigate through the mortgage process and understand how and when you can get the most favorable interest rate for your situation.
Market Conditions
Economic conditions such as inflation, the Federal Reserve’s monetary policy, the job market and more can influence interest rates. In particular, mortgage-backed securities (MBS) (bundles of mortgages that lenders sell to Fannie Mae, Freddie Mac and Ginnie Mae) can play a big role as well.
In general, high inflation, low unemployment and fast economic growth may be indicators that mortgage interest rates will rise. On the other hand, they might fall when inflation falls, unemployment rises, and the economy’s growth slows.
Paying attention to the current state of the economy is imperative to predicting how it will affect the interest rate you receive on a VA loan.
Borrower Financial Profile
Your own financial factors play a part in the interest rate you get on your VA home loan since lenders assess how “risky” it is to lend money to you. Riskier loans generally mean higher interest rates. While the VA itself does not require a minimum credit score, lenders will use yours to assess what interest rate to provide you. A higher credit score can help you get a lower interest rate, and you may have more options when it comes to loan choice.
In general, a lower debt-to-income (DTI) ratio will help you get a more favorable interest rate. Your DTI is the percentage of your monthly income that goes towards paying off your debts. To get this number, you’d divide your total monthly debt payments by your gross monthly income.
Mortgage Factors
Different factors related to the loan itself can also affect your interest rate. This can include the type of property, occupancy status, choosing to roll closing costs into your loan and mortgage points or discount points. Primary residences and single-family homes typically have lower interest rates than a secondary condo, for example.
Discount points are a type of fee that you can pay to lower your interest rate, in which one point is equal to one percent of your loan amount. This could be an option if you’re able to afford it with your VA loan.
Lender Policies
Mortgage interest rates can vary between different lenders because they all have different policies, prices and margins. When they set prices for origination, lenders need to determine what they can set for interest rates in order to make a profit. Generally, they can be more competitive on pricing when they have more efficient loan processes and when there’s a lot of competition in the housing market. This means you may want to look for an experienced lender with efficient turn times and processes.
Down Payment
VA loans don’t typically require a down payment if you have full entitlement, but if you want a lower interest rate, putting down some money upfront can help.
Not only will a down payment on a VA loan decrease your VA funding fee and monthly payments, more money put down upfront means less money you need to borrow from the lender, indicating that you’re less of a risk for them. In turn, you may be qualified for a lower interest rate on your VA loan.
Determining What Works for You
There are many factors that affect mortgage interest rates—some you can control and others you can’t. However, the key to obtaining a favorable interest rate is understanding these variables.
In some cases, you may be able to take the time to pay down debt, make a larger down payment or improve your credit score. In others, it may be that you need to pay attention to the current economy or geopolitical events.
No matter your circumstances or needs, it doesn’t hurt to speak with an experienced mortgage professional so they can give you the big picture and help you determine what’s right for you.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
