Shopping for a mortgage is different nowadays, and there are a few things you may not know if you haven't gotten a mortgage quote in a couple of years. Here are the most important changes and trends you need to consider.
Interest rates are lower
Mortgage rates have dropped, contrary to what most analysts expected, after the Fed stopped buying mortgage-backed securities in March. Turmoil in the European economy has had a lot to do with it, and the continued softness of the U.S. economy has contributed as well. But that doesn't mean that these low rates are available to everyone.
Mortgage pricing models are different
In the past, prime borrowers all got pretty much the same pricing on their mortgages. If you could get approved for a Fannie Mae or Freddie Mac mortgage, you paid the going rate. That isn't the case today. Factors like the amount of home equity you have (or the size of your down payment), your exact credit score, your property type, (condo, duplex, or manufactured home) and your loan type (whether 15-year, 30-year, ARM, cash-out refi, or interest-only), all can cause adjustments in the pricing of your mortgage. So if your credit score is 679 and your neighbor's is 680, you could end up paying more, in some cases much more, than he does for the same loan. And the rate you see advertised may only be available to you at an extra cost.
Guidelines have tightened
Mortgage lenders have made it harder to get approved for loans. Alt-A products that didn't require income verification, asset verification, or exceptionally good credit are gone, at least for now. Mortgage insurers often refuse to insure loans with less than 20 percent equity unless the borrowers are practically perfect, with strong income, assets, and credit histories.
Disclosures have been updated
Your Good Faith Estimate (GFE) has more teeth in it today. Lenders are obligated to honor the fees and rates they disclose on this form when they offer you a mortgage quote as long as you are willing to provide them with the information needed to create the disclosure. Some lenders try to get around this requirement by offering you "scenarios" or "worksheets" instead. When looking for the best mortgage rates, know that you can't rely on a quote that doesn't come attached to a GFE.
FHA mortgages have gotten more popular - and more expensive
FHA mortgages have become the mortgage of choice for many because of their low down payment requirements and more forgiving underwriting guidelines. But FHA has also changed its guidelines, requiring larger down payments from borrowers with lower credit scores, halving the amounts sellers are allowed to contribute to buyer's closing costs, eliminating seller-funded down payments, and raising its upfront mortgage insurance premium (MIP) from 1.75 to 2.25 percent. FHA has also stopped approving individual condominiums; if you want to finance a condo through FHA, the whole complex must be FHA-approved. You'll find approved condos on a list on HUD's website. Finally, FHA has been withdrawing its approval from lenders with high default rates, even if loans were originated according to FHA guidelines. As a result, many lenders are imposing stricter guidelines on their applicants than FHA does.
There you have it - the most major changes that have hit mortgage lending in the last couple of years. But you can probably expect many more twists to come.