Buying a home is often the most expensive purchase of one’s life. It signifies a commitment to an area and for a lot of people, it is coupled with another major life event like marriage or kids. Simply put, buying a house is huge deal.

So, let me tell you a bit about what banks look for when it comes to a mortgage loan and how mortgage rates are determined. Thankfully, I had Shane Wecker, president at Guardian Savings Bank in Granite City, help contribute to this piece as well.

First things first: Consumer tips

When you are applying for a loan with a bank, there are several things to consider; everyone – regardless of their experience with banking – knows to look for interest rates. While it is important and easy to find from a bank, that is not the only thing to look for. Closing fees and loan fees are common financial considerations that Wecker sees consumers overlook because they’re too focused on the interest rate. A high closing fee can be costly compared to an extra basis point on a loan.

Wecker encourages people to consider nonfinancial variables as well, things like responsiveness from the mortgage lender, the timeliness of the lender to process the mortgage, and the ability of the lender to educate you on the process itself. 

At the end of the day, this is your loan and you don’t need to be reminded on how big of a deal this is. So, ask a lot of questions all the way through the process, and make sure your lender is willing to explain things with you; it’s just as important as the financial considerations are.

What do banks look for from YOU when applying for a mortgage loan?

A bank will look at a lot of things: your debt-to-income ratio (DTI), credit score, the loan-to-value of the property, how much are you putting down, and of course, how much cash do you have. Cash isn’t just about what do you have sitting in your checking or savings account. Banks will also look at what you have in a general brokerage account, IRA’s, and even what you have in a 401k account.

A big thing that banks consider – and you should too if you are buying a house – is the down payment of the applicant. 

A good down payment, which lenders suggest is 20%, will lower the lending risk and improve your chances of being approved. A big down payment doesn’t just benefit the banks, it helps consumers as well – a bigger down payment can lower your monthly payments on the loan and avoid PMI costs.

How are mortgage rates determined?

Traditional 30-year fixed rate mortgages are closely correlated with the 10-year Treasury notes; when the rate of the note goes up or down, the mortgage rate tends to do the same. Other factors that affect the mortgage rates are housing starts (supply & demand), inflation rates, and some other secondary market influences that would just lead to a deeper and more complex conversation. There isn’t an exact formula to pinpoint mortgage rates, but from the listed variables above, you can start to paint a broad picture.

Wecker mentions that individual banks can look at competitor’s rates and terms, so a lot of banks in an area might have the same or really similar rates (which is why paying attention to the closing and loan fees can be important).

To sum it up

• Take care of your financial well-being if you have a goal of purchasing a house in the future, don’t overthink it, just be smart and start saving early.

• Rates are important, but so are fees. So, shop around and compare.

• Make sure your lender can take the time to answer your questions and meet your needs.

• As a little pro tip, sometimes local banks and lenders can have better rates, don’t be afraid to give the little guys a chance.