Refinance rates

For a large number of homeowners, the past year dealt a serious blow to their property values. Some real estate professionals predict that 2009 will offer a turnaround in the housing market. They believe prices and interest rates are currently at about the low point and consumers will take the opportunity to purchase new homes and mortgage loans in the first quarter of 2009. Most financial analysts see it differently, however. They foresee a deepening of the economic recession and a continued downturn in home values. Buyers can currently find some good deals on homes and mortgage loans, which could spur sales in some areas. But the inventory surplus from foreclosed properties may continue to hold back the real estate market. Making matters worse are the mortgage loans at adjustable interest rates that will reset soon. Many predict that will contribute to the already overburdened inventory of homes. Some consumers who would like to buy right now are finding that they are not eligible for mortgage loans like they once were. Banks now have much more restrictive lending practices, resulting in less mortgage loans being awarded to applicants than there were prior to the credit crisis.

Many people who currently own properties would like to lock in the low rates and refinance their mortgage loans. The past week had the most applicants for mortgage loans in half a decade. About 80 percent of those applications were for refinancing. Unfortunately, a fair number of those who applied were denied. One mortgage lender in South Florida said that only about 5 of the 50 customers who called about refinancing recently qualified. Many markets across the country have homeowners who now have larger mortgage loans than the values of their properties, due to the drop in home values. Banks will not approve homeowners who do not have enough equity. To be eligible for refinancing, a consumer must now have an excellent credit score, own at least 20 percent equity in the home and have a low percentage of debt. This is in stark contrast to the lending standards for mortgage loans of just a few years ago.

Many refer to the previous loose lending standards as the wild west. Those standards often required little or no down payments for mortgage loans and appeared to disregard the credit worthiness of many applicants. Although the new lending standards may be compounding the already suffering real estate market, they will offer a necessary correction for a credit market that appeared to be out of control. We will have to wait and see if the new year will offer a renewed confidence in the credit market, and ample encouragement for consumers to take on new mortgage loans to get the ailing real estate market going again.

The credit crunch has decreased applications for mortgage loans and made lenders skittish about approving new loans. Many people, both homeowners who want to refinance and new borrowers who want to buy their first house, think credit is so tight that there is no point to refinancing or to applying for a new mortgage loan. However, now may be the best time of all to fill out an application for a new or refinanced mortgage.

Why? The Fed has drastically cut interest rates to stimulate economic growth, leading to substantially lower mortgage loans’ interest rates. That can be excellent news for you, leading to much lower monthly payments and a lower overall cost for mortgage loans. If interest rates have dropped at least two percentage points between when you signed your mortgage and today, then now is the time to refinance and lock in a lower interest rate.

But aren’t banks leery of giving out new mortgage loans? Yes and no. The key is the borrower’s credit rating. Banks are more wary than they have been about offering loans to borrowers with a poor credit rating, and they are using more stringent guidelines for deciding what constitutes a poor rating, but they are eager to draw in new lenders with good credit ratings. Get a free credit report and discover what your credit rating is, and if it is good, then apply for a mortgage right away.

If your credit rating is slightly below the zone considered good, then there are a few simple steps you can take to raise it over the next six months. Pay all your bills on time scrupulously, putting them on automatic withdrawal if you can. Because banks look at the ratio of credit available to you compared to credit you have used, pay down your credit cards and existing loans as far as you can. Ignore old advice to close down unused credit card accounts; leaving the accounts open increases the amount of credit available to you, improving your ratio of available credit to used credit. Be especially wary of closing very old accounts, since doing so could shorten your credit history, which you want to be as long as possible. If you take these steps, maintain your payments successfully for several months, and avoid taking on new credit card debt, in months your score should be markedly better.

As you can see, a crisis in the credit markets can be the perfect time to refinance or to apply for new mortgage loans. Be the attractive would be mortgage holder the banks want to see, and you can get a markedly lower interest rate on mortgage loans. You can indeed turn a tight economy to your advantage.

Obtaining qualification from the lender is the first step necessary when applying for a home loan. If you are a first time buyer or have not applied for a home loan in several years, you may be asking exactly what qualification means. Basically, the qualification process determines if the lender is willing to lend to you and the amount of money you can borrow. By understanding the process, you will be in a better position to qualify for the amount you need for your home loan.

WHAT DO LENDERS WANT TO SEE?

Lenders look for evidence that you will be likely and able to repay your home loan. A consistent, dependable source of income is important. A minimum of two years with the same employer is commonly desired. If not, how long did you work for your previous employer? What if you have had a recent change in employment? Can you demonstrate your reasons were responsible and that the employment is stable? Expect that the lender will contact your employer to confirm your history. Steady employment indicates both personal responsibility and a reliable source of income.

You will also need to provide proof of the total household income you want held accountable against the loan, as well as your outstanding debt and monthly expenses. The comparison of your debt to income will be evaluated to determine your ability to meet your existing expenses and your projected home loan payment.

CREDIT WORTHINESS

Before approving you, the lender will evaluate your credit report to determine the likeliness that you will make regular, timely mortgage payments. Most importantly, lenders look for a history of consistent payments made on time. They will also be looking for evidence that you use credit wisely, staying comfortably below maximum levels.

STEPS YOU CAN TAKE BEFORE YOU APPLY

The decision to buy a home is one that takes some time. If possible, avoid making changes to your employment situation prior to seeking qualification for a home loan. Request copies of your credit reports from all three major credit bureaus and review them carefully. Be sure to correct any erroneous information as soon as possible. Also, because your debt to income ratio is directly related to your ability to qualify for a home loan, pay down as much debt as possible prior to making application. All of these actions will improve your chances of qualifying for the full amount you need for your home loan.