The average rate on long-term U.S mortgages stayed at the all-time, rock-bottom record low this past week, yet how many borrowers are really able to qualify for a home loan with a rate below 4 percent?
According to mortgage finance company Freddie Mac, the average rate on a 30-year fixed rate mortgage flat-lined during the week ended June 28 at 3.66 percent, excluding fees. That is the lowest rate on record in the 41-year history of the Freddie Mac survey. Last year at this time, the average rate was 4.51 percent.
While 3.66 percent is the new “average,” what does it actually take to get that rate on your mortgage? It’s true that lending standards have loosened slightly since the darkest days of the post-housing bubble bust, but banks are still looking for pretty specific requirements when it comes to giving out those choice rates.
For instance, the ability to document income is crucial in getting the best rates and even just to be approved a loan at all.
“What’s tougher today is the level of scrutiny and documentation and analysis and reverification around assets, income, employment and appraisals,” said Bob Walters, chief economist at Quicken Loans as quoted in a New York Times article. “Lenders are terrified, literally terrified, of repurchases. What that means is if a lender makes a mistake, or there’s a difference in opinion, and they close the loan and it goes into default, Fannie Mae or Freddie Mac could require them to repurchase the loan.”
In general, in order to secure an interest rate that starts in the 3s today, borrowers need to have a credit score around 740 as well as a substantial down payment for purchase loans or equity in their homes for refinance mortgages. That amount needs to be close to 25 percent of the home’s value in either case.
Of course, borrowers can always buy down the rate by paying the lender some upfront fees, but unless buyers are planning to stay in their homes for many years, it may simply be more cost effective to take the higher rate.