A Mortgage Rate Beginning With a 3

Mortgage rates have never looked this good. They are at about 3.81 percent for a second week, a record low. But who gets that rate? What does it actually take to secure a mortgage rate that begins with the enviable number 3?

One mortgage broker joked the other day that it required “a good mortgage broker and a prayer.”

But in reality, the borrower tends to look a lot like Javier Arau, who refinanced his $265,000 mortgage earlier this week at 3.5 percent. He and his wife, Kelley, live in a two-bedroom co-op in the Jackson Heights section of Queens. They have a respectable set of credentials, yet they are not entirely unattainable for reasonably employed people either. They have no debt, with the exception of about $30,000 in student loans. They have about 20 percent in home equity, and Mr. Arau said they considered themselves savers.

By getting out of their original mortgage, which carried a 6.25 percent rate, their monthly payment will drop by nearly $600 to $1,200. “Having $600 less to deal with each month will be a huge relief,” said Mr. Arau, who also has two young daughters. “It’s probably going to pump itself back into my business and give us a little bit of breathing room.” (He said they paid about $2,000 to reduce the original rate they were offered, or 3.75 percent, because they knew they planned to stay in their apartment for several more years.)

Still, qualifying for that rate — actually, qualifying for a mortgage at all — required a bit of patience. The couple, both in their mid-30s, wanted to refinance a few years ago, but their mortgage broker told them at the time that they would probably be turned down. The earnings of a freelance saxophonist and a part-time prekindergarten teacher were too inconsistent to pass muster with the banks. Since then, however, Mr. Arau has opened a music school, the New York Jazz Academy, and has been able to generate a consistent stream of income for two years.

So qualifying for the best rates is not impossible, as long as you have a job with steady income that’s easy to document. Of course, millions of people aren’t that fortunate.

While lending standards are considerably tighter than they were during the anything-goes days of the housing boom, some mortgage brokers and lenders said they believed the rules were still lenient, at least in some ways, including the amount of total debt you’re allowed to carry. The much greater challenge, they say, has become documenting your income and every bit of information on your application, down to the last $200 your mother sent you for your birthday.

“What’s tougher today is the level of scrutiny and documentation and analysis and reverification around assets, income, employment and appraisals,” said Bob Walters, chief economist. “Lenders are terrified, literally terrified, of repurchases. What that means is if a lender makes a mistake, or there’s a difference in opinion, and they close the loan and it goes into default, Fannie Mae or Freddie Mac could require them to repurchase the loan.” Fannie Mae and Freddie Mac are the two government agencies that buy or guarantee about two-thirds of all new mortgages. 

While one set of factors influences your overall ability to qualify, another overlapping set helps determine your interest rate. To qualify, borrowers seeking a conventional loan — typically $417,000 or less, or up to $625,500 in certain higher-cost areas — generally need to be approved by Fannie or Freddie’s automated underwriting engines used by brokers and lenders.

The formula is a bit of a black box, and some lenders may layer on their own stricter requirements. But generally speaking, the agencies and lenders look at your credit score, income, employment history, liquid assets, down payment, property value, type of property — a single-family home versus a multifamily, for instance — and how much money you have left after closing. Fannie generally wants two months of housing payments in the bank, brokers said, which I found surprisingly low though banks sometimes require more.

With the more conservative standards, the average borrower today has a significantly stronger financial profile than at the height of the boom. The average FICO credit score on a new Fannie or Freddie Mac mortgage is about 765, up from about 720 in 2006, according to Inside Mortgage Finance. On loans insured by the Federal Housing Administration, the average score has increased to 700 from about 680 in 2006.

But what interest rate you receive will be strongly influenced by the strength of your credit combined with how much equity have in your home, numbers that have derailed many deals or forced families to pay a higher rate. Your equity stake depends on the property’s assessed value. So a disappointing appraisal could mean you’ll have to pay a higher rate unless you come up with more cash at the closing.

For the week ending Thursday, the average rate on a 30-year fixed-rate mortgage was 3.66 percent along with a fee of 0.7 percent of the mortgage amount, or a rate of 3.81 percent with no fee, according to Freddie Mac. That’s the lowest level since the agency began tracking the numbers in 1971, and Freddie Mac said, probably ever. Rates stood at 4.51 percent at this time last year. 

To secure the absolutely lowest rates, you generally need to have a credit score of 740 or better and to make a down payment of 25 percent or more (or have that much in home equity if you’re refinancing), preferably in a single-family house. That said, you will probably only pay a tiny bit more with at least 20 percent in home equity. Those with a credit score of 720 to 739 will also pay slightly more, but not that much, brokers said, as long as they also meet the general approval standards.

But if you’re financing a much smaller amount of your home’s value and have a lower credit score, you may still be able to qualify for the same low rate as someone with a higher score. “Say you have a 700 score but you are only financing 50 percent of the home’s value,” said Mark Maimon, director of sales at Universal Mortgage in Brooklyn. “You might get the same rate as someone who has an 800 score doing 75 percent financing.”

Someone with a 620 credit score and 20 percent in home equity can expect to pay a rate that’s nearly 4.4 percent, depending on the lender, compared to a person with a score of 740 or higher and an identical equity stake (or the person with the lower score can pay the lender 2.75 percent of the loan amount to receive a much lower rate), experts said. But as your score decreases, the two agencies want to see either a large down payment or a lot of money left in the bank. Otherwise, you may not qualify at all. 

That’s why it’s no surprise that so many more borrowers have turned to the Federal Housing Administration’s loan program, which is much more lenient. “At a FICO 620, there is no penalty which drives the rates higher, and a borrower can have as small an equity position as 3.5 percent,” said Keith Gumbinger, vice president of HSH.com, a mortgage information Web site, though the loans typically carry other fees. “Costs may be higher but the interest rate remains at rock bottom.”

There are other reasons rates on traditional mortgages may not be as low as advertised. After the housing market collapsed, Fannie and Freddie began charging extra fees for mortgages that they insured or bought for a variety of reasons. Fannie, for instance, levies a fee of 0.75 percent of the loan amount on people buying condominium apartments if the borrower has less than 25 percent in equity.

Even if you do qualify for the best rates, be prepared to deal with all sorts of rules that will require some work. And there are still entire groups of people who will have a difficult time. It’s much easier to sail through the entire process, for instance, if you receive a paycheck. But people who are self-employed, or who receive a large portion of their income through commissions and bonuses, are likely to have a more difficult time. “If you are self-employed and your net income decreased from 2010 to 2011, even if it’s 2 or 3 percent, it’s an automatic rejection,” said Fred Glick, owner of U S Loans Mortgage, a brokerage based in Philadelphia.

But even people with easily documented income will probably leave the approval process with 

a story or two to tell. Mr. Maimon recalls a bank that required proof of where a $25 bank deposit came from. In cases with other requests on the source of deposits, he asked the lender to simply disregard that money and qualify the applicant on their other assets. But this lender wouldn’t do it.

“There is no common sense or reason left in underwriting,” Mr. Maimon said. “As an applicant, you have to roll with the punches and give the banks what they ask for. When you try to dodge it, then they just ask for more.”

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