Great Rates For Those Who Qualify

?As interest rates continue to drop and home prices around the nation plummet, one might be tempted to think now is the time to buy a home, but the reality is that most Americans are locked out of the best interest rates because qualifying for credit has become a lot tighter after the collapse of the housing market and now it takes nearly perfect credit and a big down payment in order to get the best mortgage rates.

Newly released federal credit rules that came about as a result of last year’s Dodd-Frank financial-services legislation, now require banks and other lenders to disclose to consumers the scores used to determine interest rates charged borrowers, or to deny credit. This means it will be easier for consumers to see exactly how their credit scores affect the interest rates they pay, but it doesn’t necessarily mean they will qualify for the best rates.

Because Fannie Mae and Freddie Mac finance 75% of all mortgages by purchasing the loans from the banks, they can basically dictate how much it costs to borrow mortgage money today. This makes the FICO credit scores on the loans that banks are giving out more critical than ever before. Before the housing crisis went into full collapse, , a credit score of 700 to 725 was good enough that a borrower could expect to get a conventional mortgage loan at the lowest possible rates. Between 2003 and 2006, a credit score between 700 and 750 was required for over three-quarters of all Fannie Mae mortgages.

Fast forward to 2011 and only 13% of Fannie Mae mortgages have a 750 score or better. Only 1.7% have a score of 700 to 725 and the median score is 711, according to FICO. The result is a large percentage of the population being unable to qualify for the best mortgage rates. Whereas a score of 730 was considered excellent just three years ago, now you need the 730 score as well as a 20% down payment and just one single problem on a credit score could cost an extra 0.125 percentage point per year.

For lower credit scores, the costs get even higher with an extra quarter percentage point required for scores between 700 and 725. People with scores hovering around 630 will find the additional costs equaling 1.5 percentage points if they can even find a loan at all. The upshot is that anyone with a credit score of 680 or less may not be able to qualify at all. The numbers apply to refinancing as well, with just 12% of agency-backed mortgages currently eligible for refinancing. The lesson for borrowers in the current housing loan market is that it is obviously important to pay extra close attention to your credit scores in this time of tight credit guidelines.