When the Federal Reserve> stopped purchasing mortgage-backed securities at the end of March, many market watchers expected mortgage rates to jump. Instead, they are at year-to-date lows, propelled by investors who ve been spooked by the European debt crisis and who ve taken refuge in Treasurys, pushing yields down.
Rates for a 30-year fixed loan hit 5.03% (for the week ending May 14) the lowest point since December, when it sank below 5%, according to mortgage tracker HSH Associates.
Spring and summer are typically the busiest for house hunting. And even after the federal home buyer tax credit s expiration (buyers had to have closed on a new home by April 30 to qualify), activity is still brisk, at least in some markets.
We re in the busiest time of year. People are trying to buy and sell [their homes] as school gets out in order to get the kids in a new school, says Tim Galligan, a sales manager and mortgage consultant at 1st Advantage Mortgage in Lombard, Ill.
Underwriting standards are still tight. Here s what it takes to get approved in this environment.
Do I need to have perfect credit to get these rates?
A borrower s credit score is probably the most important factor in determining eligibility for a loan. Most mortgages today are backed by either Fannie Mae or Freddie Mac and their underwriting criteria generally requires a FICO credit score of 720 and above, says Keith Gumbinger, vice president at HSH Associates.
With score of 740 or better, you ll be in line to get the very best conventional rates, with as little as 5% down payment without incurring any of those so-called risk premium adjustments that Fannie and Freddie added to most of their loans several years ago, says Galligan. (The risk premium is the added fee the lender charges a borrower to cover the perceived chance the borrower won t pay back the loan.) For every 20 points your score drops below 740, those risk premiums increase; they also rise with a lower down payment, says Galligan.
Read more about factors that determine your credit score.
How much of a down payment do I need?
For a conventional loan, you ll need to put at least 10% down in most marketplaces. In states where home prices have taken the biggest beating like Florida or Arizona borrowers might need an even bigger down payment, says Gumbinger. And if you re buying a condo, expect to shell out more.
FHA loans, which are government-insured, require just 3.5% in cash for a down payment and could be a suitable option for many borrowers who don t have a stellar credit score. FHA loans, though, come with slightly higher rates.
How will my finances impact the rate I get?
Debt to income ratio is another key factor lenders look at when granting loan approval. This is the ratio between how much you owe each month on personal debt and how much you earn. Most lenders want you to have a debt-to-income ratio no higher than 45%, says Todd LaPenta, a private mortgage banker with Wells Fargo Home Mortgage in Miami. So if a borrower pulls in $10,000 a month, their total debt including their monthly credit card payments, auto payments and expected mortgage payments can t exceed $4,500.
LaPenta also says borrowers need to get their financial house in order well in advance of making an offer on a house. Borrowers should be able to present their financial documentation showing liquidity in their personal accounts not in a business account, even if you own 100% of that business. Anything you move over right at closing, I have to source where this money came from, LaPenta says. Lender must verify the source of any large deposits to make sure it didn t come from the seller, the realtor or another person who s not a family member. If you wait until after you re in contract, there s no time to clean your financial act up, he says.
How does my employment status factor into getting approved for a mortgage now?
Generally, borrowers should have at least two years of employment or self-employment basically, any type of income in order to qualify for mortgage, says Galligan. If, for example, a borrower was laid off and has been working as a consultant for the past year, "we cannot use that income as qualifying income," he says.
In a scenario where only one spouse s income could be counted, Galligan says, the borrower could use what s called a non-occupying co-borrower, such as a parent or grandparent, to co-sign the loan. The co-borrower would be on the title of the property and the mortgage itself, says Galligan.
Here are tips on getting preapproved for a mortgage.