Trouble Qualifing for Low Mortgage Rates

By Jeanne Roberts

Home prices are way, way down from their peak just a few years ago. So are interest rates. It’s easy to find 15-year mortgage rates below rates 3.5% and 30-year fixed rate mortgages just above 4%.

Which leaves some would-be refinancers (and buyers) wondering why they can’t get the loan or house of their dreams.

The answer is complicated. America’s economy, intimately tied to the Euro and all the turmoil overseas, is losing confidence on European debt markets which see Greece as the leading edge of a PIGS ( Portugal, Italy, Greece and Spain) meltdown. This overwhelming uncertainty is driving a push toward long-term U.S. Treasuries.

This, at least, is what financial analysts like Keith Gumbinger of HSH.com foresee, and if the Federal Reserve finds shelter in these long-term Treasury notes, mortgage rates he suggests will go even lower.

This probability, however, has not inspired confidence in the lending sector, and a new study by the Fed discloses some of the underlying elements that continue to make mortgage lending rocky.

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The housing meltdown and the recession were like a heart attack in the financial community. Since then, banks have been reluctant to refinance, even borrowers who have faithfully repaid their existing mortgage. When it comes to lending for a home, the reluctance is even greater.

This reluctance, according to the study, is the result of an inability on the part of banks to face the kind of risks that they did earlier in the decade – risks that led to a housing meltdown, a tanking economy, foreclosure crisis, the failure of 325 banks, and ultimately ongoing weakness in global financial markets.

To protect themselves, lenders have tightened credit standards. Once upon a time a borrower could get by on a less than stellar credit rating, or FICO score (Fair Isaac Corporation), whose metric is used by credit rating agencies TransUnion, Equifax and Experian to evaluate a borrower’s credit worthiness.

Now, banks require a score of about 850 to refinance or lend at the advertised new low mortgage rates. Those with a rating at or slightly under 650 find themselves facing the kind of scrutiny and distrust formerly reserved for those with FICO scores under 500.

Tighter credit reflects not only the need for greater care in lending, to prevent another meltdown, but an increasing perception on the part of lenders that even “good” borrowers now present more of a risk, thanks to a shaky economy, a dismal job market and a pervasive sense that the bottom could fall out tomorrow.

For many buyers looking to refinance an existing loan, the fall in housing prices means equity in many instances doesn’t support a new loan, at least from a banking standpoint. This is particularly true of certain areas in California, Florida and Arizona, where home prices have lost more than half of their value.

As if that isn’t bad enough, these high foreclosure areas are a warning signal to banks, and the odds of someone getting a loan to buy your home, if you live in one of these areas, are considerably smaller than if you lived elsewhere, according to the study.