Rising rates are encouraging lenders to re-think strategy!
There’s a silver lining to rising mortgage rates, which have crept up over the past year. It’s now easier to get a mortgage — and it won’t likely take as long to close the loan, either.
The average rate on a 30-year fixed-rate mortgage is up nearly a percentage point from last year. The mortgage averaged 4.41% for the week ending April 3, according to Freddie Mac’s weekly survey of conforming mortgage rates. It averaged 3.54% the same week in 2013.
What’s more, the Mortgage Bankers Association’s latest forecast predicts the average rate on the 30-year fixed-rate mortgage will hit 5% by the end of the year.
But borrowers who missed the boat and didn’t capture an extremely low rate aren’t the only ones who may be in mourning. Lenders miss those low rates, too.
That’s because their disappearance means the number of people refinancing is way down, forcing lenders to consider ways to drum up business. So now, they’re often more willing to consider borrowers with less-than-perfect credit or those who don’t have a 20% down payment. With a thinned herd of applicants, they’re also able to focus on providing better service.
“Rising rates are encouraging lenders to rethink their lending guidelines and bring in more business,” said Erin Lantz, vice president of mortgages at Zillow, a real-estate website. Its Zillow Mortgage Marketplace connects borrowers with lenders online. “They haven’t had to do that reassessment of their guidelines [until now] because they were so busy with the refinance volume.”
Credit standards are loosening
“There’s an entire segment of the population that was told ‘no, no and no’ again over the past five years. [Lenders are] saying ‘yes’ to them again,” said Daniel Jacobs, division president for American Financial Network, a mortgage banking firm based in Chino Hills, Calif. “And I don’t know if [borrowers] know about it.”
These are people with good, but not great, credit — people who would have been considered quality borrowers a decade ago but were squeezed out of the marketplace after the housing crash, he said.
For conventional mortgages backed by Freddie Mac and Fannie Mae, you might need a 620 FICO score, versus the 640 or 660 you needed last year, Jacobs said. For loans insured by the Federal Housing Administration, you might need a 580 FICO, whereas lenders required a 620 or 640 a year ago, he said.
“We have seen, from the lender side, more lender quotes for consumers who have FICO scores between 600 and 639,” Lantz said.
You might not need as big a down payment
For the past several years, “there’s been this vast gulf between 3.5% [down payments] for FHA-insured mortgages and 20% [for conventional mortgages backed by Freddie Mac and Fannie Mae], and little in between,” said Greg McBride, senior financial analyst for Bankrate.com. That’s changing, and could continue to change “as long as home prices are not declining and as long as mortgage rates remain at or above present levels,” he said.
Don’t be mistaken: It’s nothing like 2006, when borrowers could put down no money at all and get a mortgage, and didn’t need to provide much, if any documentation, McBride said. While you may be able to get a loan with 10% down instead of 20%, you still need to have solid credit to get a mortgage today, and you need to prove your income, he pointed out.
One caveat, to buyers: The lower your down payment is, the less desirable you may look to sellers. And in areas with tight inventory, that could matter greatly.
If there are two offers on a home, one with a 30% down payment and one with a 5% down payment, all things being equal, a seller is likely to accept the bid with the larger down payment, Jacobs said. With more money on the line, there’s “less risk of something going awry” before closing, he said.
It takes less time to close a mortgage
A year ago, when mortgage rates were lower and lenders were way busier, it took between 60 and 75 days to close a mortgage, Jacobs said. Today, it’s a much faster process, he added.
“On average, lenders are quoting 30-day locks. That’s what they quote, and are able to follow through on their commitment,” Lantz said.
That’s the good news.
Unfortunately, today it’s also taking buyers much longer to find a home they want to buy, due to tight inventory in many markets, Jacobs said. In fact, American Financial Network has branches with a backlog of preapprovals — representing months of originations — just waiting for borrowers to find homes, he said.
You’ll get better service
Related to the point above, customers can expect better service in general from lenders.
“Lenders are competing with each other to earn trust and business. They compete on rates and fees and the quality of service they offer,” Lantz said. That means they may be better about following up and staying in touch with you or your real-estate agent.
Make it a great day!