Sunday, May 17, 2009
Good credit score? Low rates
By Michael Hartranft
Journal Staff Writer
With housing prices dropping and mortgage rates dipping to historic lows, it would seem to be an opportune time to purchase a home.
For some, obtaining a loan can be a smooth process — but for others, it can be a bumpy ride. Qualifying is not as easy as it once was.
"We got to a point in 2003 through 2007 where underwriting guidelines just cut so easy and money got so available that it's like we used to say: If we can't get you a loan, you probably shouldn't be buying a house," said mortgage broker Heidi Snow, president and founder of Perennial Mortgage in Albuquerque.
"But since the credit crisis, we've seen a considerable tightening of underwriting guidelines."
The operative words these days are "good credit." If you have it, a steady job and money for a down payment, chances are pretty good you'll be able to get financing — at highly attractive rates not seen before.
"Here at the bank, our rates have been below 5 percent, which is definitely at 30-year historic lows," said senior loan officer Carol Sinor of First Community Bank. "If you look at a graph of mortgage rates over the last 30 years, the average for a home loan was between 8.5 and 9 percent."
First Community just closed with a couple moving up to a $250,000 home at a 30-year fixed rate of 4.375 percent, she said. They had excellent credit and put 20 percent down.
"It's a buyers' market, basically," Sinor said. "Buyers have been able to get really good deals."
Even so, times have changed.
"I think the most profound difference we're seeing is credit scoring and how important good credit scores are," Snow said. "It used to be we could do financing with a 580 credit score, especially on FHA (Federal Housing Administration) financing, whereas now the minimum for everybody is 620.
"And if you don't have a 740 or better, you're going to have adjustments to your rate," she added. "You're either going to pay more points or have a higher interest rate."
Realtor Talia Freedman of Keller Williams Realty said she's seen the effects on some of her clients.
"I work with a lot of first-time home buyers and often they're folks who haven't had to deal with their credit score too much," she said. "What I'm finding is people are needing a little more time in preparing to buy a house, doing some credit repair, saving up more of a down payment than they might have. A number of years ago, these same people would have been able to buy a house as soon as they felt like it."
Snow said mortgage businesses use credit scores calculated by three credit bureaus — Experion, TransUnion and Equifax — to assess the risk of making a loan, typically merging the data from all three.
The scoring range, depending on the bureau, is 300 to 800, or 350 to 850.
"The most important information that goes into scoring is payment history," Snow said, noting that it accounts for 35 percent of the score's weight. "If you have a good payment history, you're going to have a good score. If you have any late payments, that's going to hurt your score."
Thirty percent of the score is weighted on how the person uses his or her credit.
"If you've maxed out your credit cards, that's going to negatively impact your score," she said.
Credit history — how long you've had accounts and kept them in good standing — represents 15 percent of the score. Types of credit in use and inquiries for new credit lines account for the balance of the score. For example, applying for new credit cards in a short period of time while your others are charged to their maximum can indicate higher risk.
A person's debt-to-income ratio is also used to determine whether he or she should qualify for a loan.
"The rule of thumb," Snow said, "is maybe 40-42 percent of your incomes can be spent on debt (credit cards, car loans and so forth). ... So if you make $2,000 a month and you're spending $1,200 on debt payments, you're not going to be able to qualify for any additional debt as far as a mortgage would go."
Snow said the biggest barrier facing first-time home buyers is usually the down payment.
"We used to have a lot more 100 percent financing programs," she said. "Now the only 100 percent financing programs are VA (Veterans Administration) and the USDA Rural Development programs. There is limited eligibility for those programs."
For first-time homebuyers who purchase before Dec. 1, there is an $8,000 tax credit, made available as part of the federal stimulus program.
That a 20 percent down payment is required to buy a home nowadays is not necessarily the case, Snow said.
"If you are qualified for FHA financing, then you can do 3 1/2 percent down," she said. "There is going to be mortgage insurance on that loan."
The FHA limit on loans is $271,050.
"So if you're going to buy a $400,000 house, unless you want to put a really big payment down, you're going to get conventional financing and they're going to require at least 5 percent down," Snow said. "But in order to qualify for the new mortgage insurance guidelines, you're probably going to have to have at least a 740 or higher credit score ...
"It is not necessarily that lenders won't lend on this, it's just that we can't get private mortgage insurance on those higher loan amounts."
With a 740 score, she said, a person can get conventional financing for up to 95 percent of the value of the home without any adjustments to the rates.
"If you've got a 640 to 659, you can only borrow up to 80 percent of the value, plus they're going to charge you 3 percent of the loan amount to get that loan," Snow said. "This is what we're dealing with on these lower credit scores. ... If they don't have a lot of cash to put down, they're not going to qualify."
Snow said people thinking about buying a home should give themselves some time to pay down their debts, repair their credit and save some money for a down payment. They should also get professional advice on what they can do to qualify for the best financing and terms.
"It's not like lenders don't have any money to invest; they just have much higher standards than they once did," she said.
This is part of a series the Journal is producing in partnership with the N.M. Mortgage Finance Authority, Home Builders Association of New Mexico and the Realtors Association of New Mexico.
Do your homework
The experts say someone with a credit rating score of less than 740 may have to pay a higher interest rate and need a higher down payment. Steps to improving your rating: Pay down your debt, make all your payments on time, don't take on new debt or new credit cards.
Should you refinance?
If you've been in a home at least a year with any kind of adjustable rate, consider refinancing if you have the ability, says Carol Sinor, senior loan officer for First Community Bank. "My feeling is if you wait until the rate is ready to adjust, you're going to be refinancing into higher rates at that time," she said.
In a newsletter for her clients, Heidi Snow of Perennial Mortgage said factors to consider when deciding whether to refinance include:
• Length of time you intend to own the home: Closing costs on a conventional loan could cost $2,000 or more, a high cost if the homeowner plans to stay there only a couple more years.
• Equity: If you purchased the home in the last year or two, with 100 percent financing, you might not have enough equity to refinance.
• Amount of your loan balance: The bigger the loan, the bigger difference refinancing will make in your payment.
• How long you've had your current loan: If it is more than five years, you pay more each month toward the principal and less toward interest. Refinancing to a new 30-year term would mean you would start paying mostly interest again.