Washington is doing all it can to get money flowing again in the housing sector. At around 5%, 30-year mortgage rates are at levels that haven't been seen in, well, 30 years.
If you want to buy a home or refinance your existing loan, money is there. But would-be borrowers face new challenges they didn't have during the housing boom. These include much tighter credit standards, fewer types of loans, and sinking property values that erase home equity. To figure out how to surmount some of these obstacles, we asked mortgage bankers and other real estate professionals for their tips on how to get a loan approved.
Here's what they said:
1. Go to the Government
Bank of America (BAC) does it. General Motors (GM) does it. Even AIG (AIG) does it. For home buyers, the biggest source of new loans has been government programs such as those run by the Federal Housing Administration (FHA) and the Veterans Administration (VA). You can get such loans from almost any lender. Government-run programs will accept borrowers with lower credit scores and allow them to put as little as 3.5% of the purchase price down. There are local loan limits that knock out high-end home purchases, however. And borrowers will pay slightly more than with conventional lenders, due to mortgage insurance requirements.
2. Get Your Paperwork Ready
No-documentation, low-documentation, stated-income, and "liar" loans are now—thankfully—relics of financial history. Gather all that documentation you hate to share. You'll need to bring bank statements, brokerage statements, W-2 forms, and tax returns. Then, contact a lender to get prequalified for a new home purchase. That will help in your house hunting because you'll know how much you can afford and you'll look better to sellers who'll know you have the financial firepower to close.
3. Get Out of That Adjustable-Rate Loan
With rates lower, it's an excellent time to ditch those hybrid, optional-payment, adjustable-rate loans that will likely have you paying a lot more down the road when interest rates rise, if they haven't done that already. "If you're looking long-term, rates are so ridiculously low, I would do everything in your power to get refinanced," says David Reed, a mortgage banker in Austin, Tex., and author of An Insider's Guide to Refinancing Your Mortgage. "Get into a fixed-rate loan and get that [adjustable] equation out of your head."
4. Consider Paying Up Front to Lower Rates
With home prices sliding, having enough equity to qualify for the lowest rates can be an issue. David Kittle, a mortgage banker in Louisville, and chairman of the Mortgage Bankers Assn., says one of his customers recently missed qualifying for the lowest rate because an existing $7,000 home-equity loan knocked her from having 30% equity in her home to having 25% equity. By paying a $900 fee up front—0.25 points, in industry jargon—she was able to get the loan that dropped her rate from 6.5% to 5%.
5. Boost Your Credit Score
Credit scores matter more than ever, says Jason Bloom of Elliot Bay Mortgage in Bellevue, Wash. A few points weren't a big issue during the boom. Now they can make a significant difference in your payments. Bloom says some steps you can take to improve your score are as simple as making sure you don't have more than one-third of your maximum borrowing capacity outstanding on one credit card. Rather than cancel that old Macy's (M) or Chevron (CVX) credit card you've left lying around, use them to make a few purchases. "I consider that like rotating your tires," Bloom says.
6. Keep Making Those Payments
There's a school of thought that if you want to get your present lender to lower your payment—what bankers call a loan modification—the best way to get their attention is to stop making payments. Don't do it, says Valerie Saunders, a mortgage banker in Clearwater Beach, Fla. Missing a payment by more than 30 days can have a huge impact on your credit score. You are much better off at least trying to refinance or negotiate a lower rate without being delinquent. "Your credit is something you control," Saunders says. "A loan modification is something you can't."
7. Use the Web
Scott Happ, who runs the MortgageMarvel.com search site, figures there are now 1,000 lenders, from the Hudson Valley Federal Credit Union to Citigroup (C), that will give you rate and fee quotes online. Even so, Happ says, still try your local banks or, if you're refinancing, your present lender. "They're likely to know you best," Happ says.
8. Don't Get Too Excited
Even with the recent dip in rates, if you're thinking of refinancing you may find it easier just to keep your present loan. If your home fell in value, you may not have enough equity to qualify for the cheapest rates. If you've got an interest-only loan from a couple of years ago, notes Jeffrey Gundlach, chief investment officer of the TCW fund family, refinancing into a fully amortizing loan will likely increase your monthly payments.