Q&A about today's mortgage market
Q. Can you explain what is going on in today’s mortgage market?
There are two distinctively different stories to tell in today’s mortgage market.
First – there are prime borrowers with great credit getting loans in a market with historically low interest rates. Lenders are literally chomping at the bit for this type of borrower. If you fall into this category, it’s important to shop your loan to ensure you get the best deal.
Second – we have borrowers with fair to poor credit, the inability to document their income or assets and little to no down payment. For these borrowers, it’s currently a difficult time to get a loan. Instead, borrowers in this category should try to improve each of these areas of their borrowing criteria. If you fall into this category, ask yourself if you can take the time to save more money for a down payment or if you can you improve your credit score. These are necessary changes for to make in order to get a loan in today’s market.
Q. When does LendingTree foresee the home loan market getting better?
The mortgage industry is certainly going through turbulent times right now. The market is undergoing a shakeout and this is likely to continue for some time. In September, we had Doug Duncan in town for our eighth annual LendingTree Partner Summit. He’s the Chief Economist of the Mortgage Banker’s Association and he shared the MBA’s belief that the mortgage market will likely start to rebound late next year.
Q. Is it still possible to get a loan in today’s market?
Despite the news, the fact is, tens of thousands of borrowers are getting good, competitive mortgage loans every day. Credit is still available and lenders are, of course, still making loans. With conditions as they are, being a prime borrower is quite advantageous in today’s mortgage market. That means if you have a credit score above 720, the willingness to document your income and assets and the ability to make a down payment of at least 10 percent, you should not be negatively affected by today’s market situation. In fact, you’re in the driver’s seat when it comes to getting a competitive loan with a great interest rate.
Also, keep in mind that now – more than ever – it is important for consumers to shop their borrowing needs. The market is extremely competitive so whether you go to LendingTree.com or you look for your loan on your own, make sure to visit at least three lenders so you can do an apples-to-apples comparison on mortgage products, rates and fees.
Q: Where can I get a copy of my credit report?
It’s vital to know both your credit score and what’s on your credit report before you shop for a loan. By visiting www.annualcreditreport.com you can easily get a free copy of your credit report from each of the three big credit reporting agencies. There is a small cost associated with getting a copy of your actual credit score but if you are ready to move forward on getting a new loan, it’s a good idea to pay the fee to get your score. You need to understand how lenders view your credit worthiness. If you have a lower credit score (below 660), think about how you can improve it before you apply for a loan. There are articles in the LendingTree Smart Borrower Center that will offer you advice in this area. The availability of loans for those with lower credit scores is shrinking, so taking the time to boost your score will increase your chances of finding a good loan at a competitive rate.
Q: Why is it important to shop my loan and what questions should I ask lenders?
Shopping your loan allows you to make an apples-to-apples comparison on your loan options, rates and fees. Make sure to visit at least three lenders and get copies of your Good Faith Estimate (GFE) from each of them so you can make a healthy comparison. Remember, prime borrowers are in a good position to get a great loan in today’s market so do whatever you can to become a prime borrower and make those lenders compete for your business.
If you’re ready to start loan shopping, make sure to print this list of the top questions to ask. This will help you during each of your conversations with lenders. Create a chart allowing you to jot down the answer of each question from each lender. When you’re done, you will have the information you need to compare all your loan options.
Q. What determines if you’re a prime borrower, a sub-prime borrower or an Alt-A borrower?
Lenders group borrowers into three main categories of borrower, and what defines these categories is the level of risk associated with that type of borrower.
1) A subprime borrower is a borrower with damaged credit, which means they have a credit score below 660.
2) A prime borrower is a borrower with a credit score above 720. This type of borrower often meets the three requirements of getting a loan at a great rate: a high credit score (above 720), the willingness to document their income and assets, and the ability to make a down payment of at least 10 percent.
3) An Alternative-A borrower – or what is called an Alt-A borrower – falls somewhere in the middle of a subprime and prime borrower. Generally a borrower who falls in this category is not able to meet one of the three important requirements that we discussed before – high credit score, willingness to document income and assets and the ability to make a down payment of at least 10 percent.
Q: How much home can I afford and what other costs should I be aware of when owning a home?
Owning a home costs more than just the mortgage payment. When you think about what you can afford, you must consider your property taxes, homeowner’s insurance and maintenance costs. Be realistic about your budget before you begin house or mortgage shopping. Our home affordability calculator can help you decide how much home you can purchase. Also keep in mind, today’s market conditions will require a down payment and documentation of your income and assets. The days of 100% financing (buying a home with no down payment) are basically gone.
Q: How do you refinance an adjustable rate mortgage (ARM)?
If you have an adjustable rate mortgage and are considering refinancing, first thing you need to do is understand the loan you currently have. Ask yourself the following questions:
- When will my loan adjust?
- How much will it adjust by?
- What will my new monthly payment be?
These questions will help you evaluate your loan and get a better idea of what’s coming down the pike as far as rate and payment adjustments go. If your loan is going to reset in the near future – say in the next month or two – you may want to consider refinancing. But, if your loan is not set to adjust for a year or longer, now may not be the best time to refinance.
Next you need to understand the situation you are in:
- Discover your credit score. A borrower with a credit score of 720 or above is a prime borrower in the eyes of lenders and will be eligible for the best rate and terms on a new home loan.
- Can you document your income and assets? Lenders are looking for borrowers who have the ability to document at least two years worth of income and assets so make sure you are prepared and have your hands on some of this historical information. You can likely contact your employer and your bank to get older paychecks and statements that you can’t seem to locate.
- Discover the equity you have in your home. Contact a local REALTOR® and ask that they prepare what is called a Comparative Market Analysis or a CMA. This is a full report detailing the value of your home based on market conditions in your area and what comparable neighboring homes are selling for. This is a great tool that will be prepared for you free of charge by a local REALTOR®.
Each of these actions will help you plot a path towards borrowing better. If you discover you’re not in a good place to refinance and are worried about your situation, consider contacting NeighborWorks® America Homeowner’s HOPE Hotline at 1-888-995-HOPE. Here you will receive experienced counseling and be connected, as appropriate, with a lender or local NeighborWorks organization. NeighborWorks America is an organization created by Congress to provide financial support, technical assistance, and training for community-based revitalization efforts.
Q: What’s happening to the jumbo loan market?
Typically with jumbo loans (loans greater than $417,000), borrowers see an interest rate increase of about 25 basis points – or ¼ of one percent – over a typical conforming loan rate. For example, if today’s average 30-year fixed rate conforming loan (less than $417,000) was around 6.5%, an average jumbo loan rate would be typically .25% higher or around 6.75%. Right now, the jumbo loan rate spread has increased by a full percentage point pushing these rates to over 7.50%. This seems to be an irrational market reaction to today’s current situation and should normalize relatively quickly.
Q. How does a Fed rate cut or hike affect interest rates for borrowing?
When the Federal Reserve cuts or raises their Federal funds fate this has an indirect affect on interest rates for some home loans. When the Fed makes a change to its Fed Funds rate (the interest rate that banks charge each other), we often see a mirror image adjustment to what is called the prime rate. The prime rate is the rate it costs banks to borrower money over night and is currently at 7.75%. When the prime rate changes, this triggers a rate adjustment with indices, which are the financial products that determine interest rates for shorter term loans such as 3-year, 5-year or even 7-year ARMs. These short-term loans have interest rate adjustments periodically based on Treasury averages or specific indices like the London Interbank Offered Rate indexes (LIBOR). Knowing what Treasury average or index your ARM is tied too will help you keep an eye on any fluctuations. Check your loan documents to find this information.
For longer-term home loans – such as 30 or 15 year fixed rate loans – these are typically influenced by the 10-year Treasury note and are not as easily or quickly affected by a Fed move. When interest rates are rising, many homeowners opt for a fixed rate loan but when rates are lower, adjustable rate mortgages may be more attractive to borrowers. The choice you make should be based on your current budget and your risk tolerance. If you’d rather have the certainty of a fixed monthly payment, a fixed rate loan will be the best bet for you. In today’s market, fixed rate loans are at historically low rates.
While the Fed does not directly control mortgage rates, it does have an indirect impact on borrowing rates, particularly with shorter term loans. If the Fed cuts rates, credit card interest rates will dip slightly, as will auto loans and, even some home loans.
Q: If my questions weren’t answered here, where else can I find information about getting a loan in today’s market?
If you have additional questions, please visit the LendingTree Smart Borrower Center located at www.lendingtree.com/smartborrower. This Web site is an online education resource that will arm you with the information, tools and advice you need to help navigate the sometimes-confusing world of credit, debt and loans. Here you’ll find hundreds of objective articles, helpful and easy-to-use calculators, as well as printable loan guides that together, will help you make smart borrowing decisions. You can also stay up to date on the latest tips and tools by signing up for our monthly Smart Borrower eNewsletter. Remember, knowledge is power, so if you are in the market for a new home loan make sure to get the facts and get yourself a great loan at a great rate!
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