Lending Rates Shrinking (Excellent)…Along with Available Loans (Bogus)

The good news: Interest rates on housing loans are at their lowest point in six months. The bad news: If your credit report has a few blemishes, it may be difficult to obtain one of those loans. Not too long ago, it was ridiculously easy to get a home loan. I remember a loan officer telling me as recently as last year that “If they can fog a mirror, they can get a loan.”

My how things have changed. So how hard is it to get a loan these days at a rate that won’t make the prospective house unaffordable? Experts say the rules for obtaining a home loan have undergone more revision in the past 18 months than during any comparable period since the Great Depression, as lenders attempt to streamline practices that landed the industry in its present bind.

The federal government recently put some numbers on this upheaval: It sifted through 21 million mortgage applications and reported that about one-third were denied last year. The main reason was the applicants’ credit history, the Federal Reserve reported.

Here is a rundown of what you’re up against if you’re looking for a home loan in the current upside down real estate world:

Conventional Loan v. FHA Loan

Determine which type of loan you will need. Conventional programs typically provide private mortgage insurance to provide for a lower down payment and easier qualification guidelines, and conform to Fannie Mae or Freddie Mac standards (although what those are these days is anybody’s guess). FHA loans are typically designed for low- and middle-income borrowers and many first-time buyers.

Down Payment

FHA
The good news is that FHA loans require only about 3% down, but this will increase to 3.5% on January 1st. It is typical for sellers in today’s market to cover the buyers’ closing costs, as well, which can usually be another 3%.

Conventional
Even with excellent credit, the bare minimum these days is 5%. However, most applicants for conventional mortgage loans can expect to put down at least 10%.

Credit Score (For your free annual credit report, click here)

FHA
There is no steadfast credit-score requirement for an FHA loan but many banks have become increasingly stringent about credit scores. Requirements will vary from one lender to the next, but the typical credit score for an FHA loan is around 580.

Conventional
The minimum score to obtain a conventional loan is 620; However, for the best available interest rate on a conventional loan, the borrower will need a near-perfect 740.

Obviously a lot of the sub-prime mortgage opportunities that were so gleefully tossed about over the past several years have limped off into the sunset…along with several of the banks and financial institutions convinced that the risky loans would never come up lame.