Why You Might Not Be Able to Get a 5% Mortgage

February 5, 2009

Finance

Reaching for 5 Percent
Reaching for 5 Percent

Government loan giants Fannie Mae and Freddie Mac, as well as the Federal Housing Authority (FHA), a division of the Dept. of House and Urban Development (HUD), have been slowly, but surely, tightening up guidelines, and making it more difficult for all but the very most qualified borrowers to get the best rates. Sure, the Federal Reserve Bank (the Fed) has cut its funding rate, but that doesn’t directly translate into lower mortgage rates. It does directly affect home equity lines of credit (HELOCs), as well as credit cards and car loans, but mortgage rates are, for better or worse, more influenced by Wall Street than by the Fed.

Here is a list of items that negatively impact interest rates now:

  • FICO score or credit score: Lenders will use the middle of three credit scores they pull on you, or they will use the lower of two if only two scores are available. There are progressively worse mortgage rates if your credit score is below 720, then below 700, then below 680, then below 660, and finally below 620.
  • Loan-to-value, or LTV: This is how much money is you are borrowing versus how much a home is worth. For example, if the house costs $100,000 and you need to borrow $90,000 (you have $10,000 for a down payment), your LTV is 90%. Once again, the mortgage rate you can find gets progressively worse at: above 60% LTV, above 70% LTV, above 80% LTV, and above 90% LTV. And with home values falling, your LTV will probably be higher than you thought.
  • Escrows: Not having your taxes and insurance escrowed (which means including them with your mortgage payment) causes the rate you pay go up, but only by a little.
  • Cash out: If you are taking cash out when you close, the rates will be worse. And please note that if you took out a second mortgage or equity line after you purchased your home, and are paying this off, it counts as cash out, even if you are not walking away from the closing with cash in your hands.
  • Condos: Lenders consider condo loans a riskier transaction, and pricing for a condo is much worse than for a single family house, probably 3/8 to 1/2 point higher rate.

So next time you see 5.0% on a web site or in the paper, unless you have above a 720 credit score, have 40% equity in your house, are escrowing taxes and insurance, are not taking cash out or paying off a second mortgage, and live in a single family home, don’t expect that’s the rate you can get.

More Tightening of Lending Rules

On top of not being able to get the rate you were hoping for, it is simply more difficult to get a loan at all. Here are a couple of rules that may be tighter these days:

  • Mortgage insurance (MI) companies won?t insure condos with a 95% LTV any more. This means lenders cannot lend up to 95% LTV on condos, no matter what.
  • Many lenders and mortgage insurance companies are requiring borrowers to have a total debt-to-income (DTI) ratio of 45% or less; they want to make sure you can afford your mortgage.
  • Stated income and no income verification programs are a thing of the past. Full documentation, which means copies of W-2s, pay stubs, tax returns, etc., are all required now, regardless of how good your credit is, or how many assets you have.

After years of aggressive lending, we are now back to basics.

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About Brad Walbrun

Brad Walbrun grew up in northeastern Wisconsin, moving to Chicagoland over a decade ago, and never to return, although he remains an avid Packer fan. He is married, with 3 children, living in Schaumburg. Brad's passions are fitness, MMA, and mortgages. He has been in the mortgage industry since before the refi boom, for almost 10 years now. You can reach Brad at (847) 975-4440 or bradwalbrun@hotmail.com.

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9 Responses to “Why You Might Not Be Able to Get a 5% Mortgage”

  1. George Says:

    You really put this market into prospective Brad, thanks for input.
    George

  2. Katie Anderson Says:

    It appears that our government Republicans and Democrats are currently in a stalemate when it comes to our economy and what should be done. Interesting to see all the different opinions on what needs to be done to stimulate the economy and get American’s back on their feet. Here is what one Republican has to say:

    http://online.wsj.com/article/SB123380033980550585.html

    I am not quite sure I agree but I do know that our recovery is going to be long and painful.

  3. Rudi Hofmann Says:

    Brad, with the exception of Mortgage Insurance, everything you mentioned and you could of mentioned more, are fees.

    The only way the rate would be affected is if the borrower wanted their fees incorporated into the rate, instead of paying them out of pocket.

    Escrows (Impound Account) has always been required if the loan to value was above 80%. We’ve always had fees for property type, type of ownership, loan to value, credit score tiers, cash out, interest only, etc.

    Now we have a few more and some are higher than before. But, Rates are at a Historic Low!

    Happy funding, Rudi

  4. Brad Walbrun Says:

    Rudi-the fico score adjustments and LTV adjustments are new, and have not always been there. And there can be an inversely proportionate relationship between rate and fees. I can give somebody a really, really low rate, or do really, really low (or non-existent) fees, but not both. And this article was meant to educate realtors, buyers, and homeowners on what goes into an interest rate, not somebody like yourself who apparently has all of the answers already.

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