Mortgage rates have plunged to record lows, below 4 percent. That’s great – but only if you can actually qualify for a loan, and that’s not easy. After giving away the store during the housing boom with disastrous results, lenders have tightened their underwriting standards, leaving many would-be home buyers out of luck.
But there are steps homebuyers can take to find the right mortgage and qualify for it. Here are seven:
1. Improve your credit score: A credit score below 620, as measured by the Minneapolis company FICO, will knock most potential buyers out of the running for a mortgage. And even if you can qualify for a loan, lenders reserve their best interest rates for borrowers with the highest credit scores – typically 740 and above.
To see where you stand, start by checking your credit report, which is available free at annualcreditreport.com, preferably at least six months before you’re ready to shop for a home. You can get a free report once every 12 months from each of the three credit reporting companies: Experian, TransUnion and Equifax.
2. Decide what type of loan is best for you: Fixed mortgages offer the security of knowing your rate will never rise; since rates are near or at record lows, there’s a pretty good argument to be made for locking them in now. On the other hand, an adjustable-rate mortgage offers even lower rates and might work if you expect to move within a few years.
A 30-year loan will keep monthly payments lower, but if you can swing it, a 15-year loan will have a lower interest rate and will save you tens of thousands of dollars over the life of the mortgage.
If you have less than 20 percent down, you have the choice of a Federal Housing Administration mortgage or a conventional mortgage with private mortgage insurance. FHA loans allow down payments as low as 3.5 percent, but carry an upfront fee of 1.5 percent of the mortgage amount plus an annual fee of 1.15 percent, according to Keith Gumbinger of HSH.com, a Pompton Plains, N.J., company that tracks the mortgage market.
3. Shop around: Check with several lenders, not just the one recommended by your real estate agent. Compare interest rates and closing costs like fees for the application, appraisals and so on.
4. Get a preapproval: Lenders will give prequalification letters – informal estimates of how much house you can afford. But you should go further and get a preapproval letter, which is a tentative commitment from a lender. To get one, you’ll have to show the lender documentation of your income, assets and debts. Though a preapproval is not binding on either the lender or the home buyer, it’s a way of showing sellers and real estate agents that you’re a serious buyer.
5. Be prepared to show lots of paperwork: Fannie Mae and Freddie Mac, the government entities that guarantee loans, are forcing lenders to demand much more documentation these days, including pay stubs, tax returns and bank statements – “anything that can prove you are the borrower you claim you are,” Gumbinger said. And they will ask for fresh documents, like pay stubs, just before the closing to make sure nothing has changed.
Because of these tighter documentation standards, Matthew Gratalo of Real Estate Mortgage Network in River Edge, N.J., recommends that you start saving pay stubs, bank statements, canceled rent checks and other paperwork several months before you even start shopping for a house or a mortgage.
6. Consider locking it in: Many lenders will offer borrowers the chance to lock in their mortgage rate free for up to 45 days, and some will lock in for up to 60 days, either free or for a small fee. Gumbinger advises buyers to seriously consider locking in the rate, especially now, since there’s not much room for rates to fall.
7. Don’t mess it up at the last minute: Once you have your loan approval and make an offer on a home, don’t throw the whole deal into doubt by making moves that will change your credit profile. Don’t quit your job or take out a big car loan, for example. Don’t apply for a new credit card, even if a merchant offers you 10 percent off if you do.