Q: We keep hearing everywhere that interest rates are "historically low," but no one I know seems to be able to qualify to get the 4.4 percent we keep hearing and reading about. How do you qualify to get the lowest rates? What do you advise a financially fit person to do to increase her credit score or make herself a more attractive buyer?
A: As I write this, 30-year fixed-rate mortgages are right around 4.44 percent. Last week, the Fed announced that it plans to keep the rates at which it lends money to the banks at nearly zero for the near term, so banks will keep mortgage and other lending rates very low, encouraging consumers to buy homes and make other major purchases.
But, to your point, all the news stories in the world about low interest rates and the explanations of why they’re low do nothing to help you understand how to qualify for the best rates! While it’s true that these rates are out there, many of the people who have the financial credibility to qualify for them are extremely fiscally conservative, i.e., not buying homes right now.
Many of the folks who are buying right now are people who feel an urgent need to buy while prices are very low and they can still afford to — i.e., folks who don’t have absolutely perfect credit and dozens of thousands in cash to put down.
For example, if you’re getting an FHA loan, but putting only 3.5 percent down, you might have to pay a bit more in interest. You don’t hear a whole lot of complaints about this, because most of these folks are just grateful to buy a home at half the price of yesteryear — and a rate that, while it’s not the lowest out there, is still really, really low.
First off, borrowers must understand that lenders are all about risk — they offer the lowest interest rates to the borrowers whose financial history proves the case that they pose a very low risk of defaulting on their loan.
And coming off this recent foreclosure crisis, banks are very well aware that borrowers who can’t document their income, or who have little or no skin in the game in terms of downpayment money, are much more likely to default than others.
Hence, the core ingredients it takes to qualify for the best interest rates:
- Credit Score: A FICO score of 700 or better qualifies you for the highest rates. In fact, it qualifies you just as well as a higher score, so if you’re at or over 700, there’s no loan qualification rationale for investing effort into boosting it. But 700 is a hard breaking point. The difference between a score of 698 and a score of 700 can cost you a quarter of a point in interest, or thousands of dollars over the life of your mortgage.
- Job tenure: Two years or more on the same job and in the same industry is ideal.
- Downpayment: Mortgages are certainly available with 3.5 percent downpayments, but 20 percent down is ideal if you want to qualify for the very best interest rates.
- Assets: You must document that you have the necessary cash to close the transaction (downpayment and closing costs), plus a nice cash cushion, with actual account statements. Funny business is no longer tolerated — they will want to see every single page of your bank and traded asset account statements for the last two months, to make sure they don’t see any big lump sums, like your grandma might have lent you temporarily just to get you into a home.
Next week: the million-dollar (or quarter-point) question: What can you do to make yourself more attractive to lenders, especially by increasing your credit score?