Can You Negotiate Mortgage Rates?

How to negotiate mortgage rates

Before you enter mortgage negotiations, you’ll want to know where you stand financially and understand what fair market rates and terms are for your specific situation. When preparing to negotiate, you’ll want to show your creditworthiness and ability to pay back debts.

You’ll need to know your credit score, what’s on your credit report and your debt-to-income ratio (DTI). Aim for at least a very good FICO credit score of 740 to 799 and a DTI of no more than 36% to demonstrate you are a strong and reliable borrower. You’ll also want to have a sufficient down payment. For instance, you’ll need 20% down for a conventional mortgage but only 3.5% down for an FHA mortgage.

Having a strong, stable income will also improve your borrower profile and put you in a good position to negotiate. Having two years of tax returns and W-2s showing your income will demonstrate that you have the ability to pay the loan for the foreseeable future.

1. Know your target budget

You may get preapproved for an amount that the bank is willing to loan you, but don’t trust that it’s an amount you will be comfortable paying. It’s important to double-check your own budget and understand what you actually want to pay.

Besides the principal and interest payments on the mortgage, you will also have to pay homeowner’s insurance and property taxes. The monthly principal, interest, taxes and insurance (PITI) payments should be less than 25% to 28% of your monthly income. Adding in other long-term debt should keep your debt-to-income ratio less than 33% to 36%.

With this information in hand, you can calculate what your target interest rate and closing costs are. Even a quarter of a percent can impact your monthly payment, so you’ll want to understand exactly what you can afford.

2. Check current rates

“The best place to start is with trusted sources like Freddie Mac’s weekly rate survey or major financial outlets that publish daily averages. But keep in mind, those are just benchmarks,” said Marc Halpern, CEO of Foundation Mortgage. “Your actual rate depends on your personal financial profile and the type of loan you’re applying for.”

Mortgage lenders often publish market rates on their websites, which will give you a good idea of the range of rates you may be offered, but you won’t know precisely what you will qualify for until you get preapproved. Get preapproved with several lenders to better understand the terms you qualify for.

Knowing what the market rates are and what you specifically can get approved for will help you get the best deal. If you have two offers and your preferred lender has higher rates and fees, you can present the other offer to the lender and ask it to match it.

» COMPARE: Top mortgage companies

3. Understand your borrower profile

Your borrower profile consists of your credit score, credit report, debt-to-income ratio, income history and down payment. The stronger your application and borrower profile, the more leverage you will have in negotiations.

Adam Hamilton, co-founder of REI Hub, explained, “This profile basically tells lenders how likely you are to repay the loan, making all of your payments on time. Having things like a great credit score, a high income, a low debt-to-income ratio, etc., all demonstrate to your lender that you are more reliable and thus, they are taking less of a risk in lending to you. Less risk means a lower rate can be justified.”

For example, a borrower with a credit score of 750, a DTI of 20% and a 20% down payment will have an easier time negotiating rates and fees than a borrower with a credit score of 640, a DTI of 35% and a 5% down payment.

The stronger borrower will attract more lenders and have greater leverage in negotiations.

4. Compare your offers and rates

When comparing offers, don’t just look at the interest rate. Also, look at the fees and the total cost of the loan. You may have better luck negotiating fees rather than the interest rate.

To help you compare, you should get three to five quotes. You can also check online reviews to see if others had success negotiating the terms of their mortgage with your chosen lenders.

“Ideally, you should get at least three quotes, but the more, the better,” Halpern said. “Each lender has different pricing structures, risk appetites, and program options. Even a small difference in rate or fees can translate into thousands of dollars over the life of the loan. The key is to compare all the details, not just the headline rate.”

Mortgage fees you can negotiate

In general, it’s easiest to negotiate fees that lenders charge, rather than third-party fees. But you should always be clear about every fee you’re paying and understand what the fair market rate is for each fee.

Here are some fees you may be able to negotiate:

• Origination fees
• Discount points
• Underwriting fees
• Application fee
• Title insurance

You may also be able to negotiate your real estate commission directly with your real estate agent.

» LEARN: Mortgage questions to ask your lender

Fees you can’t negotiate

Of course, some fees will be difficult to negotiate because your lender doesn’t have control over these fees. This can include:

• Appraisal fee
• Credit check fee
• Tax service fees
• Flood certification fees
• Taxes
• City and county stamps
• Recording fees
• Courier fees

Top mistakes and red flags when negotiating

One main misstep you can make when negotiating your mortgage is not shopping around and focusing only on the interest rate and ignoring closing costs.

Halpern explained, “The biggest mistake is focusing only on the interest rate and overlooking fees, closing costs, or prepayment penalties.”

He also reiterated that not shopping around — or only shopping around with big-name lenders — can stop you from getting the best terms you can qualify for. “Sometimes a specialized lender or broker can offer more flexible programs that save you money in the long run.”

This illustrates how important it is to understand the market. Getting multiple quotes and doing your research will make sure you are getting the best deal.

You should also have a clear, set target rate you’re aiming for — it’ll help you to research current rates and apply your specific borrower profile during negotiation. “You want to be prepared with numbers and evidence to back those up,” Hamilton added.