Mortgage rates have hit record lows more than a dozen times in 2020, according to Freddie Mac’s weekly survey of rates. When rates are consistently below or near 3%, as they have been this year and are anticipated to remain in 2021, it is a compelling enticement to buy your first home, move up into a larger home, downsize into a “just right” home or invest in a second home.
“All indications are that rates will stay low through 2021,” says Ron Wivagg, national sales support manager for Prosperity Home Mortgage, LLC. “Given the pressures on the economy from the Covid-19 virus and political dynamics, there is no indication that rates will be increasing anytime soon.”
In addition, the Federal Reserve’s commitment to keep the Federal funds rate low will help keep mortgage rates low. However, not every borrower qualifies for the lowest possible mortgage rates, which is one reason it is essential for buyers to consult a lender and get a loan pre-approval before shopping for a home, recommends Wivagg.
“No one wants to shop for a home and find out they can’t afford the home they love,” says Wivagg. “In today’s competitive market, sellers expect buyers to have a written pre-approval and may not even look at an offer from a buyer who doesn’t have one.”
Market dynamics and lending standards
The turmoil and tragedy of the Covid-19 pandemic briefly upended the real estate market when it began to spread in March 2020.
“The federal government allowed mortgage borrowers to put their loans on hold with forbearance programs if they lost their job or were furloughed due to the pandemic,” says Wivagg. “That created concern for lenders and investors that they might not get repaid for millions of outstanding loans, so credit qualifications for new loans were tightened.”
“Lenders are beginning to be able to loosen back up a little and the industry is seeing the return of some low down-payment loan programs,” Wivagg says. “Prosperity offers a variety of loan programs with low down payments and works with government programs that offer grants to income-qualified buyers for even lower down payment requirements.”
Prosperity, for example, introduced their “UpLift” program in several markets, including Baltimore, Philadelphia, Richmond and D.C., to help make homeownership more affordable to low- and moderate-income borrowers.
“We’re trying to find ways to get qualified borrowers the lowest possible rates,” says Wivagg.
Borrowers who were furloughed and are back at work can typically qualify for a new mortgage, says Wivagg, but if they are earning a lower income they must qualify based on that new income. Self-employed borrowers or those who earn money from commissions or bonuses that dropped during the economic downturn will need at least 60 days of bank statements to demonstrate that their income has recovered to previous level to qualify based on that higher level of income.
“Borrowers who are in forbearance on a mortgage or who are currently furloughed can’t qualify for a mortgage until they are back at work or caught up on their loan,” Wivagg says.
Understanding mortgage rates
A big misconception among borrowers is that when average mortgage rates are under 3%, they assume everyone gets that rate, says Wivagg. However, numerous factors go into the mortgage rates offered to borrowers. Issues that lenders consider when determining a mortgage rate include:
- FICO credit scores. Borrowers with a FICO score of 760 or higher pay the lowest mortgage rates on conventional loans. Borrowers with scores below that threshold are considered riskier and pay a slightly higher rate according to a tiered system, so raising a credit score even a few points may push someone into a different tier and save them money.
- Loan-to-value. The less equity a borrower has in a home, the higher the risk for the lender. Loans with a low down payment typically have a slightly higher interest rate than loans with a bigger down payment. In addition, Wivagg points out, borrowers who make a down payment of less than 20% will need to pay mortgage insurance.
- Property type. Loans for a primary residence have lower rates than those for second homes or investment properties. In addition, condo buyers typically pay a slightly higher rate than buyers of single-family homes.
“The main driver of rates is your credit score,” says Wivagg. “Borrowers should do their best to raise their credit score to get the lowest mortgage rates.”
Preparing for a loan application
Prosperity offers a “Buyer Advantage” loan pre-approval based on full documentation of a buyer’s income and assets.
“In today’s market, sellers want to see a fully underwritten commitment, especially if they get multiple offers,” Wivagg says.
Lenders are flooded with loan applications during this hot housing market, so Wivagg says buyers should anticipate closing their loan in 45 days. However, when buyers need to close faster, it is possible to do so in 20 days.
“Buyers can speed the process by gathering everything they need for a loan application such as their bank statements, pay stubs and W2s,” says Wivagg. “The biggest delay in loan approvals occurs when customers don’t respond to requests for information or documents. We’ll need documentation, for example, if they receive a monetary gift as a contribution toward a down payment.”
This year, lenders have also been verifying employment by phone twice—once at the beginning of the application process and again within three days of closing.
“Borrowers should communicate that to their employers and provide accurate contact information because with everyone working from home it can be harder to reach an employer for verification,” Wivagg says.
If you are thinking about buying your first home, moving up or downsizing, consider Prosperity/FM Lending as your financing partner. Their team can work with you and their affiliates at Fonville Morisey/The Long & Foster Companies to help you buy or sell a home, insure it, go to settlement and arrange your move.