Want a mortgage with a low interest rate? For that to happen, your financial planets will have to align just so.
Mortgage rates have never looked this good. Rates on a 30-year fixed mortgage slipped below 4 percent in early May and have stayed under 3.9 percent through June. But who gets that rate? What does it actually take to secure a mortgage rate that begins with the enviable number 3?
One mortgage broker joked that it required "a good mortgage broker and a prayer."
But in reality, the borrower tends to look a lot like Javier Arau of New York, who refinanced his $265,000 mortgage last month at 3.5 percent. He and his wife, Kelley, live in a two-bedroom co-op in the Jackson Heights section of Queens. They have a respectable set of credentials, yet they are not entirely unattainable for reasonably employed people either. They have no debt, with the exception of about $30,000 in student loans. They have about 20 percent in home equity, and Arau said they considered themselves savers.
By getting out of their original mortgage, which carried a 6.25 percent rate, their monthly payment will drop by nearly $600 to $1,200. "Having $600 less to deal with each month will be a huge relief," said Arau, who also has two young daughters. "It's probably going to pump itself back into my business and give us a little bit of breathing room." (He said they paid about $2,000 to reduce the original rate they were offered, or 3.75 percent, because they knew they planned to stay in their apartment for several more years.)
The couple, both in their mid-30s, wanted to refinance a few years ago, but their mortgage broker told them at the time that they would probably be turned down. The earnings of a freelance saxophonist and a part-time prekindergarten teacher were too inconsistent to pass muster with the banks. Since then, however, Arau has opened a music school, the New York Jazz Academy, and has been able to generate a consistent stream of income for two years.
So qualifying for the best rates is not impossible, as long as you have a job with steady income that's easy to document. Of course, millions of people aren't that fortunate.
While lending standards are considerably tighter than they were during the anything-goes days of the housing boom, some mortgage brokers and lenders said they believed the rules were still lenient.
The much greater challenge, they say, has become documenting your income and every bit of information on your application.
"What's tougher today is the level of scrutiny and documentation and analysis and reverification around assets, income, employment and appraisals," said Bob Walters, chief economist at Quicken Loans. "Lenders are terrified, literally terrified, of repurchases. What that means is if a lender makes a mistake, or there's a difference in opinion, and they close the loan and it goes into default, Fannie Mae or Freddie Mac could require them to repurchase the loan." Fannie Mae and Freddie Mac are the two government agencies that buy or guarantee about two-thirds of all new mortgages.
While one set of factors influences your overall ability to qualify, another overlapping set helps determine your interest rate. To qualify, borrowers seeking a conventional loan -- typically $417,000 or less -- generally need to be approved by Fannie or Freddie's automated underwriting engines used by brokers and lenders.
With the more conservative standards, the average borrower today has a significantly stronger financial profile than at the height of the boom. The average FICO credit score on a new Fannie or Freddie Mac mortgage is about 765, up from about 720 in 2006, according to Inside Mortgage Finance.
But what interest rate you receive will be strongly influenced by the strength of your credit combined with how much equity you have in your home. Your equity stake depends on the property's assessed value. So a disappointing appraisal could mean you'll have to pay a higher rate unless you come up with more cash at the closing.
To secure the absolutely lowest rates, you generally need to have a credit score of 740 or better and to make a down payment of 25 percent or more (or have that much in home equity if you're refinancing), preferably in a single-family house.
Someone with a 620 credit score and 20 percent in home equity can expect to pay a rate that's nearly 4.4 percent, depending on the lender.
Even if you do qualify for the best rates, be prepared to deal with all sorts of rules that will require some work. And there are still entire groups of people who will have a difficult time.
It's much easier to sail through the entire process, for instance, if you receive a paycheck. But people who are self-employed, or who receive a large portion of their income through commissions and bonuses, are likely to have a more difficult time.
"If you are self-employed and your net income decreased from 2010 to 2011, even if it's 2 or 3 percent, it's an automatic rejection," said Fred Glick, owner of U S Loans Mortgage, a brokerage based in Philadelphia.