Although mortgage interest rates have dropped like an anchor, getting approved for a home loan is still not an easy task.
Rates dropped substantially when the Government took over Fannie Mae and Freddie Mac a week ago. Mainly prospective purchasers who have a credit score of 740 or higher – along with a 20% down payment - can qualify for low rates around 5.80%. During the real estate fest just a few years back, applicants who had credit scores of 620 could secure financing at the low rates. Even a 580 score would get them an attractive interest rate.
In a strategy to make credit more available to home buyers, the Treasury dept will purchase mortgage-backed securities from Fannie and Freddie since they are the major source for lending institutions. However, credit scores will play a major role in who gets approved or not. A person’s credit rating can range from 300 to 850, with 300 being very low and 850 being the best. Only those people with the highest credit scores are getting the best mortgage rates and terms.
In addition, Fannie and Freddie have raised their fees for borrowers who have low credit scores. If your score is low, your fee will be larger. If your score is above 700, you will still be charged a fee which is very different from the boom times. Borrowers need to adjust and not think they are getting bamboozled by mortgage brokers or lenders. This is what has happened due to the housing prices declining in certain parts of the country. Investors in mortgage-based securities are justifiably requiring that they be paid extra for any extra risk when a prospective borrower is involved in the transaction. The fees can range from .25% to people with credit scores of 720 to 1.5% for borrowers who have scores of 630. This fee is paid upfront to the investors and sometime can add 1% to the actual principal balance. So, you will need to go with the flow for a while.
Even the FHA is or will be increasing their premium for insurance in the near future due to taking on more risk. FHA mortgages have some very attractive features such as low down payments from 3%, allowing relatives or unrelated borrowers to help you qualify for a mortgage and the loan is govt. insured. To understand all the new nuances in mortgages it is recommended you speak with a licensed loan officer or apply online, get some rate offers, and don’t forget to examine the terms with an expert. If you feel unsure about the rate or fees, always get a second opinion.
Frank Collins is an avid investor in real estate and contributor to Jumbo Home Mortgage and
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