Mortgage hunt tough, not impossible

What borrowers can do to get favorable terms.

If you were thinking of getting a mortgage before the current blizzard of bad financial events struck, the good news is: You can still get a home loan, and, at least for now, rates have been falling.

But the caveat is: You'd better be creditworthy.

The US Treasury's takeover of mortgage finance giants Fannie Mae and Freddie Mac earlier this month signaled that mortgage money will remain available.

"The recapitalization of Fannie Mae and Freddie Mac means they will continue to provide mortgages to good credit quality borrowers and at lower rates," than before the government intervened, says Keith Gumbinger, vice president of HSH Associates, which tracks consumer loans and mortgages. In effect, "good credit quality borrowers will not be as penalized for the difficulties of their less creditworthy brethren."

Despite the undoing of Lehman Brothers, the buyout of Merrill Lynch, and the bailout of insurer American International Group, creditworthy borrowers are still being welcomed by lenders. "Most of the private firms in the mortgage market had already pulled away, leaving Fannie Mae, Freddie Mac, and the FHA [Federal Housing Administration] as really the only games in town," Mr. Gumbinger says. "That hasn't changed."

But the current mortgage and housing crises have brought much tighter lending standards. In Gumbinger's view, borrowers now should have a FICO (Fair Isaac Corp.) credit score of about 720 or higher, versus what he calls a "break point" of about 680 about two years ago. Moreover, they should be able to document their income and carry a manageable amount of debt.

"At the height of the market's boom, you might have been able to leverage as much as 55 percent of your monthly gross income to cover the amount you owed for your mortgage principal and interest, taxes, insurance, and any other debts with longer than 10 months to run. Now, that debt ratio should be no more than 43 percent," Gumbinger says.

As for down payments, most lenders are seeking a minimum of 5 percent. As of Oct. 1, the minimum down payment for a mortgage insured by the FHA rises to 3.5 percent from 3 percent. In most cases, borrowers also need to obtain mortgage insurance for any down payment of less than 20 percent.

The bright side: Those with stellar credit, a provable income stream, and the funds to make a sizable down payment, should find lenders ready to do business.

The best priced and most available loans are the traditional 30-year fixed-rate mortgage. According to Freddie Mac's weekly primary mortgage market survey for the week ended Sept. 11, average interest rates for a 30-year fixed have fallen almost 0.6 percentage points over the past four weeks to a 5.93 percent average. Rates on adjustable rate mortgages (ARMs) averaged 5.21 percent, up from 5.18 percent four weeks earlier.

While ARMs are largely out-of-favor these days, "if there is a popular ARM, it's the 5/1 hybrid ARM," whose interest rate is fixed for the first five years of the loan, after which it becomes adjustable, says Gumbinger.

With today's conservative lending, many riskier offerings have been disappearing. Take the now-much maligned subprime lending and so-called "alternative-A [alt-A] products" that required little or no documentation of borrowers' assets. "In 2005 and 2006, subprime and alt-A loans accounted for 30 percent of all lending," says Guy Cecala, publisher of the newsletter Inside Mortgage Finance. When those offerings began to dry up, "it took out almost one-third of the market."

On the high-end side, borrowers seeking jumbo loans, of about $800,000-plus, can expect difficulty, experts say. Those seeking such mega­loans would need at least a 20 percent down payment and face higher rates than with Fannie Mae- and Freddie Mac-conforming loans, says Christine Clifford, vice president of Wholesales Access Mortgage Research & Consulting Inc., in Columbia, Md.

Evidently, consumers have been feeling the pinch. In June, Deloitte surveyed 2,019 American adults about their experiences obtaining different types of credit in the past year. Among other findings, fully 67 percent of respondents who'd applied for a home mortgage "found it more difficult" to get one. As Adam Schneider, principal at Deloitte Consulting, spells out, getting a mortgage "is harder compared with a couple of years ago, when you seemingly could fill out a form, didn't have to prove anything (about your income) and get a fair amount of money quickly from a bank."

So what should home loan borrowers do to get favorable terms on a mortgage?

Plan well in advance, experts say, by taking these steps:

•Review your credit history by obtaining a copy of your credit report. Once a year, you can get a free copy through annualcreditreport.com.

•Improve your credit score by paying down debts and continuing to pay bills on time.

"Don't open a new credit card," says Barry Habib, CEO of the online, Mortgage Market Guide. Instead, "go to your current credit issuers and ask that your credit limit be increased. That way, if you hit a financial speed bump – say, your car needs major repairs – you can put that expense on your credit card and not delay bill payments" because you lack the funds. "That's an easy way to improve your credit score."

•Assess your housing needs and financial situation to determine the kind of mortgage to obtain. For instance, "if you're a young, single person buying a studio apartment, you might not need a 30-year fixed rate mortgage," says Gumbinger. That means "you need to know your borrowing objectives and goals to determine the path to take and avoid the wrong decisions."

•Check with a number of lenders – at least four to five, if possible – to find the best terms. For information on lending terms, stop in at, or phone, your bank and other lenders, check advertisements in newspapers, and visit websites such as hsh.com and bankrate.com.

"If you're out shopping, you'll find the price of money is widely variable right now … especially for an adjustable rate mortgage. Many smaller institutions, such as small banks, thrifts, and credit unions, are stepping up with very aggressive pricing," Gumbinger says.