Did you know that increasing or decreasing your loan or down payment by even $1 can significantly change your rate? It’s true.
If you want to save money on your home loan, it is critical to understand the various limits for loan amounts, down payments, and credit scores as they can have a dramatic impact on your mortgage rate. When you come to the edge of one of these limits, the savings can be huge.
For example, lowering your rate by .5 percent — going from a rate change of 5 percent to 4.5 percent — could save you $45,000! This example is based on a $416,000, 30-year fixed mortgage.
Let’s look at three levers involved in mortgages that can save you money:
1. Loan amount boundaries
You should be aware of three major loan amount boundaries. The boundaries are based on the type of loans Fannie Mae and Freddie Mac are willing to buy. Fannie and Freddie are two government sponsored entities (GSEs) that continuously buy loans from lenders. If your loan amount conforms to their loan size specifications, it is more likely your lender will be able to sell the loan to one of these GSEs. When lenders can sell loans and don’t have to keep the loan on their own balance sheet — tying up their own capital — they are able to offer lower mortgage rates. Here are the loan amount boundaries:
- Loans less than $417,000: The standard conforming loan limit is $417,000. This means that if you get a loan for less than or equal to $417,000, you may qualify for their lowest rates.
- Loans within county limits: In some geographic regions, the conforming limits are higher because average home prices are higher. These expanded limits can go as high as $729,750. Loans that fit between $417k and the county limit are called “super conforming.” These loans still have great rates, but they can be .125 points higher than conforming loans under $417,000. Check out the FHFA.gov site to find the loan limit for your county. (Note: These loan limits are changing Oct. 1).
- Loans above county limits: Any loans that are larger than the county loan limits are called “jumbo” loans. These can be priced as much as .5 point higher than conforming loans.
It is important to know the cutoffs. If your loan amount is close, you can increase your down payment, thereby lowering your loan amount, and bring it under the cutoff.
2. Down payment boundaries
The down payment percentage (the amount of money you put down as a percent of the value of the home) is also important. There can be rate drops at various levels.
- 20 percent – The gold standard for down payments has historically been 20 percent or more. This is where you typically get the best rates. So if your down payment is around 18 percent or 19 percent, consider increasing your down payment.
- 10 percent, 5 percent – Rates can go up as your down payment decreases. 10 percent and 5 percent are common down payment amounts, so sometimes there are larger rate differences around these numbers than others. Five percent is also the minimum for Fannie Mae conforming loans and 10 percent is their cutoff for jumbos. So if you planned to make a 4 percent down payment, you should consider increasing to 5 percent in an effort to lower your mortgage rate.
- 3.5 percent – This is the lower limit for FHA loans. If your down payment is 3 percent, consider putting a little more down to see if you qualify for an FHA loan. It is very hard to qualify for loans right now with a down payment lower than 3.5 percent.
3. Credit score boundaries
This is a no-brainer: High credit scores mean lower mortgage rates and lower credit scores mean higher mortgage rates. That’s why having a good, solid credit score (720 or above) will result in lower rates, assuming all other things are equal. However, there are some credit score limits that will have a more profound impact on your rate. Below are the most important edges.
- 580 – This is the minimum credit score required for an FHA loan.
- 620 – This is the minimum credit score required by Fannie Mae. However, most Fannie Mae loans require at least 660.
- 660 – This is typically the minimum for most conventional loans. Anything below this is typically considered subprime and will be harder to get financing. Although you can get loans at this credit score, you will normally pay a much higher rate.
- 720 – This is the historical cutoff to get the best rates. At this level you will not get any negative rate adjustments. However, in the current market, you can now get even better rates for higher scores.
- 760 – This is where you will now get the best rates. There may be some lenders who give additional breaks at extreme scores (800+) but for the most part, anything above 760 will give you the best rates.
Although changing your credit score isn’t as easy as deciding to increase your down payment, there are some things you can do to make sure your score is as high as possible. You can check your free annual credit report and ensure there are no inaccuracies, pay your bills on time, refrain from maxing out your available lines of credit, and use credit repair sites to remove old blemishes.