Nationwide Mortgage Licensing System (NMLS) Practice Exam

Typically, which of the following characteristics will lower the interest rate offered on a mortgage loan?

1. A lower credit score

2. A higher debt-to-income ratio

3. A larger down payment

4. A shorter loan term

The correct answer is: A larger down payment

A larger down payment is a characteristic that can significantly lower the interest rate offered on a mortgage loan. When borrowers provide a substantial down payment, they demonstrate lower risk to lenders. This is because a larger down payment reduces the overall loan amount compared to the property's value, which implies that the borrower has more equity in the property from the outset. Lenders view this as a sign of financial stability and commitment, leading them to offer more favorable terms, including lower interest rates. In contrast, a lower credit score often leads to higher interest rates because it signals to lenders that there may be a higher risk of default. Similarly, a higher debt-to-income ratio indicates that a borrower has a greater portion of their income allocated to debt payments, which can also raise the perceived risk, resulting in higher rates. A shorter loan term can actually result in lower interest rates, but not as reliably as a larger down payment, which is specifically tied to the borrower’s investment in the property.