Using the Rule of Three in Selecting a Home Loan

September 29, 2020


Securing a mortgage to purchase a home can be confusing and full of opportunities for mistakes. Some of the most common errors homebuyers can commit involve choosing the right lender and getting the best terms available. In order to select the best rates, right lender, and the mortgage that best fits your needs, make sure you have a thorough understanding of your creditworthiness, the most up-to-date market trends, and pick among your options with a broad array of criteria. One way to select your lender is by employing the “rule of three.”


Finding a Lender and Selecting a Home Loan

Each year, an increasing number of homebuyers begin their search for a mortgage online. The Internet offers a wealth of opportunities for lenders and buyers to meet, which benefits both sides and offers a more diverse arena for establishing a lender/borrower relationship.
For lenders, the web provides access to a wider pool of borrowers and allows mortgage companies to reach beyond the potential customer base they are able to market through traditional advertising means. Borrowers benefit by taking advantage of greater competition — a factor that lowers rates and increases incentives and other bonus mortgage features.

Determining Your Worth as a Borrower

Once you have scoured the Internet looking for the right lender, you will need a clear and thorough understanding of your overall financial profile. The better, more attractive your application, the more favorable rates you can expect from lenders competing for your business. Your mortgage application is judged by three main criteria: Ability, stability, and willingness to pay.

Your ability to pay is boiled down to your financial assets and income. Lenders follow in-house criteria for establishing your ability to pay based on the amount of the potential mortgage payments against your monthly income. An example of this formula would be an applicant with a reliable income of $2,000 per month and a mortgage application yielding a $700 monthly mortgage payment. At almost three to one (income to payment), the applicant in this example is likely to qualify for the mortgage providing the other criteria shows an equal or greater chance the terms will be met by the buyer.

Lenders favor applicants who demonstrate stability in their lives overall. This includes a significantly stable history of employment and residence. An applicant who has moved more than twice in the past 10 years and changed jobs as frequently or more often will be viewed as a less-stable potential borrower than someone who has lived and worked at the same location over the past decade.
While moving and switching jobs aren’t necessarily disqualifiers, instability is a factor in determining whether an application will be approved and if so, what term rates will be offered.

Willingness to Pay
Your willingness to pay is exemplified primarily in your credit history. Credit history is judged largely on your credit score, with consideration given to the types of credit issues reprinted in your credit report and the trends in your credit history profile. An applicant with a FICO score in the 700s is more likely to be approved and receive a lender’s most favorable rates than an applicant with a score in the 600s with delinquent accounts littering his/her credit report.

Choosing Among Mortgage Offers: The Rule of Three

The Rule of Three is a method of differentiating between mortgage offers to select the option that gives you the most value at the most competitive rate. Simply put, weigh your options and eliminate the most costly offer as it is generally less favorable than you can find elsewhere. Eliminate low-ball offers as well, as they are likely from lenders who plan to short change you on key ingredients of a worthy mortgage loan.

What’s left in the Rule of Three are middle-of-the-road lending offers that work to provide you with the best of both worlds — a solid array of benefits at rate terms that are fair and fit within your budget. Reali Loans offers homebuyers the chance to receive multiple refinance rate offers online so they can review options for mortgage refinancing. Accurate quotes are delivered fast and applicants are able to lock in rates to ensure savings they can trust. Get a no-obligation custom rate quote on our home loan page using Reali Loan’s free quote tool.

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