Until a few months ago, it seemed that anyone who could fog up a mirror could get a mortgage.
Now, with a credit crisis roiling the industry, some consumers might think they have a better chance winning the lottery than finding a home loan.
The truth is that you can still get a mortgage. It just may not be as easy--or as cheap--as it was over the past few years.
"If you have good credit, can document your income and have money for a downpayment, it’s largely business as usual," says Greg McBride, senior financial analyst at Bankrate.com.
Borrowers seeking non-"jumbo" mortgages of $417,000 or less and have good credit "will get the red carpet rolled out for them at the bank," McBride adds.
But if you are lacking in any of that criteria, or need to get a jumbo loan, be prepared to be turned down or pay a much higher rate.
"If you have poor credit, cannot document income, or looking for 100% financing -- it's tough sledding," says McBride.
Subprime loans for people with credit scores of 600 or less? Forget it. The standards have been tightened to the point that subprime mortgages, 20% of the mortgage market last year, are a thing of the past.
Also gone are a variety of products ranging from "no-money-down loans" with low teaser rates to interest-only mortgages that increase the amount owed to the lender over time.
And for borrowers between prime and subprime, the so-called alt-A loans, getting a mortgage will also be harder to find.
"They tightened up the market and there are less lenders to utilize," says Cindy Saxman, broker and owner of Guilford Funding in New York. "A lot of the banks have withdrawn their no-income verification financing, and lifted rates and requirements for larger loans. There are still lenders out there, but it's a tough situation for many who were once able to qualify."
Jumbos Cost More
Even for borrowers with good credit, getting a jumbo loan of $417,000 and above could cost more than one percentage above the rate you would pay for a so-called conforming loan, says Bankrate's McBride. The reason is that Fannie Mae and Freddie Mac, the government-sponsored mortgage backers, can't buy jumbo loans from banks, so they're riskier for lenders to make.
Guilford's Saxman says a borrowers' FICO score remains the top criteria that lenders use to set the interest rate. According to FICO.com, a borrower with a top level credit score of 850 can expect to pay about 1.6 percentage points lower than a borrower with score of 620.
On a $216,000 30-year fixed-rate mortgage that would mean the lower scored borrower would pay $82,000 more over the life of the loan versus a borrower with a higher score.
The type of loan also is a big factor. The rate on a home equity line of credit, which increases a borrower's debt level and risk, is averaging 8.47%, according to Bankrate.com.
The average rate on a more conservative 30-year fixed-rate mortgage is averaging 6.17%.
Some relief for borrowers is coming thanks to lower Treasury market yields. That has pushed mortgage rates down across the board.
Freddie Mac, a government-sponsored loan buyer, says the average rate on a 30-year fixed-rate loan fell 0.1 points to 6.62%.
Issues with the borrower aren't the only hurdle. More companies are either merging with bigger lenders, or are going out of business, leaving fewer lending choices and options.
Mortgageimplode.com, a web site that tracks mortgage businesses, counts 131 lenders which have either shutdown since late 2006, or have been merged with bigger competitors.