Writing for the Washington Post, Kenneth R. Harney vented about the biggest financial paradox of the year. Mortgage rates are among the lowest they've ever been. Real estate prices in some cities have fallen by as much as half from three years ago. Mortgage lenders are hungry to get back into the business of closing deals. So why does it feel like home loans have suddenly become so scarce?
Mortgage lenders go by the numbers
Harney suggests that much of the blame falls on the credit scoring systems mortgage lenders use for automated decisions. When Fair Isaac first started assigning numeric scores based on borrowers' credit histories, many Americans found themselves in the mid 600s. If you used credit wisely, your FICO score would rise to the 700s. And if you really knew how to tweak the algorithm, you could inch your credit score even closer to that magical top score: 850.
Then, the market collapsed. Mortgage lenders have raised their expectations of borrowers. Many storefront banks won't engage in discussions about new home loans unless you've got a FICO score well above 700. Meanwhile, economic pressures have pushed many consumers' credit scores down, often by 100 points or more. A quarter of American consumers now have credit scores below 600, knocking them out of contention for most home loan deals.
Best mortgage rates go to those with best credit
If your credit score falls between 600 and 740, it's still possible to find a mortgage lender or mortgage broker willing to work with you. You'll need to be flexible, and you'll want to follow these tips:
- Learn your credit scores from FICO and from the three major credit reporting bureaus.
- Confirm the removal of credit report inaccuracies before shopping for mortgage quotes.
- Transfer balances to get your credit cards under the 50 percent utilization mark.
- Request mortgage quotes online from multiple companies, so you improve your chances of finding a lender that understands your financial situation.
Beware companies that promise they can give you a "clean slate" credit report or make radical improvements to your credit score overnight. While some legitimate "rapid rescoring" companies can expedite removal of inaccuracies, it takes time and patience to really improve your score. Instead, leverage the power of the Internet to find a mortgage broker who can understand your long-term financial potential.