This week the 30-year mortgage rate sunk below 4% for the first time ever, yet mortgage applications continue to drop, according to a recent article in the Wall Street Journal.
Despite the attractive rate, lending standards remain tight, making it difficult for many would-be homebuyers and refinancing borrowers to secure funding. While it is harder now to land a loan than it was five years ago, it’s not impossible.
Here are a few tips to help prospective homebuyers and borrowers secure a home loan.
Get your finances in order
Before you can ask for a loan, you should know how much money you have and how much you can afford to borrow. Knowing this up front will also save you the potential heartache of getting attached to a home you can’t afford. It’ll save you, your lender and your agent a lot of time, too.
You are entitled to a free copy of your credit report from each of the three major credit rating agencies once a year. Make a habit of getting it. Each report shows if you were more than 30 days late in making a payment on any of your existing loans or bills and lists inquiries made into your credit. If you come across any discrepancies, you’ll want to inquire about them before you start shopping for a loan.
You’ll also want to gather your most recent pay stubs, bank statements and tax forms. Any reputable lender you work with will need this information to determine if you qualify for a loan.
Limit credit inquiries while you shop for a loan
It may sound crazy, but shopping for a loan actually does ding your credit score by a couple points. So does applying for a new credit card or taking on new debt. Since your credit score helps to determine your interest rate, try to limit your number credit inquiries. Don’t open any new lines of credit or make any large purchases until after the deal is closed.
Most experts will tell you to do all your mortgage loan shopping within a two-week span, as that will show up as one inquiry.
Save for a large down payment
The more money you can put into the transaction, the better your chances of securing a home loan. For FHA loans, you’ll need at least 3.5%, though FHA loans come with more restrictions.
A 30-year conventional loan typically requires 20% down, but some lenders will make an exception depending on the property type and your financial situation. Note, though, that anytime you put down less than 20%, you’ll have to pay for insurance on the loan, which means added monthly expense.
As the housing crisis continues, watch out for special offers from lenders. A recent article in Smart Money describes how many financial institutions, from national banks to local credit unions, are looking for ways to entice consumers to sign up for mortgages.
If low home prices aren’t enough, some banks are waiving lender fees, lowering rates and offering to pay closing costs. You may be able to leverage a large down payment and a lender discount in your favor.
With basic understanding of today’s housing market, securing a home loan is not impossible. Be prepared by getting your financial house in order, and you’ll be able to take advantage of record-low mortgage rates and home prices.