The constantly shifting tectonics of the financial world have created a home loan market that has been upended. Volatility is an understatement: mortgage rates fluctuate and are updated to loan brokers three and four times daily. The good news is that interest rates in are the lowest they've been in nearly forty years.
The goal is to learn how to take advantage of these low rates. The popular media has given the impression no banks are giving loans. Not true. But buyers and those refinancing will face the scrutiny of banks. Here are four steps to prepare you for obtaining a loan and obtaining the best rates.
1. Know your FICO Score:
The higher your FICO score, the lower your mortgage rate. Your FICO score (short for Fair Isaacs Corporation, the most widely used credit score model) is determined by a cryptic algorithm by the mysterious Big Three credit rating agencies -- Experian, TransUnion and Equifax. The range for FICO scores is 300 - 850 or 900. In general, a FICO score above 720 will make you eligible for the best rates. Buyers with lower credit scores can get loans -- just at higher rates.
The government has mandated that you can get a FREE copy of your credit report at AnnualCreditReport.com (you will have to pay only to get your FICO score). A FICO high score is more critical than ever when applying for loans. If you are planning on buying (or refinancing) even many months from now, review your credit report and take care of any items that need attention.
Advice: Everyone should annually review their credit report to make sure it is consistent with your financial activity. Also prevent identity theft by verifying your report.
2. Assemble Your Downpayment:
Assess how much cash you have that can be used to purchase a property. If funds are going to be borrowed, consult your sources and discuss loan terms for the downpayment. If stocks or other securities are going to be liquidated for the purchase, identify them and make a plan to generate cash.
If you have less than 20% downpayment, you will typically pay mortgage insurance on the property (PMI = private mortgage insurance). Amounts vary, but it could add a couple of hundred dollars per month to your "nut". FHA (FHA = Federal Housing Authority = government-backed) loans allow you to put down as little as 5%. Even if you don't have a signifcant downpayment, a home purchase may still be an option.
Advice: The greater the downpayment, the better the loan terms. Analyze your finances and evaluate how much money you can afford to allocate to a downpayment leaving you enough reserves for an emergency.
3. Understand Loan Limits:
There are 3 basic categories that determine loan rates in California ($ amounts for single family homes/condos are below):
Conforming -- Under $417,000 -- Best rates -- a few weeks ago, these were in the 5.0% range (updated 1/26/10).
Jumbo-conforming -- $417,001 - $729,750 -- about .5% higher rate than conforming loans
Over $729,750 -- Jumbo loans -- the rates are up to 1.5% higher than jumbo-conforming rates
For 2 - 4 unit properties, jumbo-conforming loan limit: (updated 1/26/10)
2 Units -- $934,200
3 Units -- $1,129,250
4 Units -- $1,403,400
Advice: Understand the "moving levers" of loans. "Discount points" means a percentage of the loan the Buyer/Refinancer must pay to obtain a loan -- one "point" = 1% of the loan. 5/1 loan means fixed for five years, then adjusting every year afterwards. "Fully amortized loan" means payments include interest and principal and over the course of the loan term (e.g., 30 years) the loan will be paid off in full. If you don't know financial terms, ask your lender!
4. Get a Pre-qualification Letter:
Go to a mortgage broker or another lender (your bank or credit union) and have them review your finances to see how much you will qualify for. Mortgage brokers shop from a number of available loan programs on the market and tend to get better rates than banks (that are selling only their loan products.) In this market, experience matters, entrust yourself who a professional who knows how to close a deal.
Advice: Get recommendations and find an experienced lender. Have them review your finances and find out how much a bank will lend you. Discuss how you can lock a rate to purchase a home or investment property.
New York Times: "Credit Scores: What You Need to Know"
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