Since the credit crunch began, millions of Americans have been denied their dreams of homeownership by lenders who were understandably cautious. Although it may not have felt like it at the time -- especially when the best mortgage rates for 50 years were being offered to the lucky few -- that was probably a good thing. With near-unprecedented volatility in house prices and employment, the risks to lenders and borrowers alike were too high.
More Accessing the Best Home Loans...
But now, with the economic recovery finally gaining traction, mortgage lenders are slowly widening their view of which applicants represent an acceptable risk. Many borderline folks, who would have been turned down just a few months ago, now stand a decent chance of seeing their applications approved.
True, this shift is only just beginning and is happening slowly. On March 20, Ellie Mae, Inc., a private-sector supplier of IT systems to the mortgage industry, released its February Origination Insight Report. It showed the average FICO score of borrowers who closed their purchases that month was 745, down four points from the previous month. Meanwhile, the average down payment was lower, and debt-to-income ratios were higher – indications that underwriting standards are relaxing.
A March 22 story in The Los Angeles Times claimed that the loosening of lending standards was also suggested by anecdotal reports within the mortgage industry.
... But Progress Still Slow
On April 12, The New York Times published a report under the headline Signs of Easier Money for Mortgages. It quoted one expert who suggested you still need either a great credit score (760 to 780) with a lower down payment (perhaps 5 percent), or a lower credit score (maybe 720) and a substantial down payment (nearer 20 percent) to stand the best chance of getting approved.
Of course, those with lower down payments and spottier credit may be eligible for VA loans and FHA loans. Those loans do require the payment of mortgage insurance premiums or funding fees, which add significantly to their costs. However, that may not matter much to borrowers who think today's low mortgage rates can't last long.
How to Get the Best Home Loans
Whatever your current circumstances, there are things you can do that could help you qualify for the best mortgage rates possible. And the sooner you start the process, the sooner your credit report is likely to look attractive to prospective lenders.
Here are five of the steps FICO, the company behind America's biggest credit-scoring system, recommends:
- Get a copy of your credit report, and have any errors (they're more common than you may think) corrected.
- If you're behind with any accounts get -- and stay -- current.
- Pay down your credit cards as much as you can. Ideally, your total balances should be 20 percent of your total credit limits -- or less.
- Don't apply for any new forms of credit during the run up to your mortgage application. That includes auto loans, consumer accounts and credit cards.
- Paying off a collection account won’t make it go away unless you get the creditor to agree to remove it. It’s best to pay off collections as soon as they appear -- new activity on an old collection causes the derogatory information to be weighted more heavily and could drop your credit score.
If you've been frustrated by lenders that are unwilling to approve you for a mortgage, take heart. There's a good chance that lending standards are going to continue to loosen, and it may be only a matter of time before you get the keys to your own home -- especially if you follow those five steps.