Today’s low mortgage rates might make your mouth water, but after shelling out hundreds of dollars for application fees and appraisals, a loan applicant may have the rug pulled out from under him.
Yes, the average 30-year fixed-rate loan is charging just 4.675%, according to the BankingMyWay survey. But getting the lowest rates advertized takes a virtually perfect credit history, and many borrowers who easily qualified in the past just can’t satisfy today’s jittery lenders.
Still, it may be worth it to get a loan even if you don’t get the lowest rate possible.
“Borrowers today are paying for the excesses of yesterday,” writes Jack M. Guttentag, emeritus finance professor at the Wharton School, on his website, The Mortgage Professor. “During the go-go years leading to the crisis, underwriting rules became incredibly lax, and now they have become excessively restrictive.”
Mortgage approvals are based on underwriting rules that stipulate things like how large the borrower’s income must be in relation to the loan, how clean the borrower’s credit history must be, and the percentage of the home’s purchase price that can be financed.To get the lowest advertised rates, a borrower must have a credit score of 740 out of a possible 850, Guttentag says. Nearly 60% of people with credit scores fall below that 740 threshold.
To get the lowest loan rate, the borrower also must have a loan-to-value ratio, or LTV, of no more than 60%, Guttentag says. That means you’d need a $120,000 down payment to buy a $300,000 home.
This may explain why such a high percentage of new mortgages, about four out of five, are being refinanced. Many of these borrowers already have a lot of equity in their properties, enough to satisfy the demanding LTV requirement. Also, many would-be first-time home buyers simply don’t have enough cash, and are getting shut out.
The big players in today’s mortgage market are Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE). Both buy mortgages from lenders and bundle them into securities that are sold to investors. To protect the securities’ quality, the two firms set minimum underwriting standards.