Mortgage rates are great

Spring typically is when people start shopping for a home.

And with interest rates dropping to record lows, now is an attractive time to refinance or to buy a home - provided you can qualify for a loan.

"Two years ago, you could fog a mirror and get a loan," said Linda

Davidson, senior loan officer at Service First Mortgage in Garland.

"Now, you really have to qualify. You really have to show income, and you really have to have enough credit history to show that you repay your bills."

If you pass muster, "there's financing to be done," she said.

The federal government's efforts to bring down mortgage rates and make more families eligible for mortgages insured by the Federal Housing Administration have brought consumers out of the woodwork.

"We're all working overtime," said Craig Jarrell, president of the Dallas region at Pulaski Mortgage Co.

Incentives to buy

Rates on 30-year mortgages fell last week to the lowest level on record for the second consecutive week and are down by more than a full percentage point from a year ago.

Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages dropped to 4.78 percent last week, from 4.85 percent from the previous period.

A government sweetener - an $8,000 tax credit for first-time homebuyers on homes purchased before Dec. 1 - also has helped fuel demand.

Consumers who qualify for the tax credit may claim it on either their 2008 or 2009 federal income tax returns. A tax credit is more valuable than a tax deduction because it's a dollar-for-dollar reduction in your tax liability, while a tax deduction cuts your taxable income.

Davidson said: "The $8,000 tax credit has been a big incentive for people to call and see if they qualify to purchase."

That's where things get sticky.

"I've never talked to so many people with bad credit than I've had in the last two months," Davidson said. "In the past, we could talk to 10 people and seven could qualify. Right now, we're talking to 10 and three qualify. Their credit scores are really, really low or their stated income does not exist."

To get the best interest rates, your credit score has to be above 740 now, Jarrell said. "A year ago it was 700."

The widely used FICO credit score ranges from 300 to 850.

To get an FHA-backed loan, your credit score has to be at least 620, Davidson said.

A low credit score also will make it tougher to get private mortgage insurance, which protects lenders if you default on your loan.

Joel Luebkeman, spokesman for PMI Mortgage Insurance Co. in Walnut Creek, Calif., said consumers in the Dallas-Fort Worth area need a minimum credit score of 620 to get mortgage insurance from his company.

"Previously, we went down to as low as 580," he said.

Your income and assets also must be "fully documented," he said.

Bigger down payments

The easiest way to avoid having to buy mortgage insurance is to put down at least 20 percent of the home's purchase price. If you can't afford that, you still will have to put some amount down.

FHA-insured loans require a 3.5 percent down payment. Most lenders are requiring a minimum of 5 percent down on conventional loans, said Keith Gumbinger, analyst at HSH Associates in Pompton Plains, N.J., which publishes mortgage information.

"You can still find lenders who can do 95 percent financing, providing you can get private mortgage insurance," he said.

But the 5 percent requirement may not last long, Jarrell said.

"Five percent down payments are hanging by a thread," he said. "I think 10 percent is going to be the new minimum. I think the government is pushing us in that direction. They've tightened the guidelines, so it's harder to lend the money."

Mortgage broker Gary Akright already is seeing that trend.

"Lenders have not loosened their underwriting standards," said Akright of Dominion Mortgage Corp. in Dallas. "If anything, it's being tweaked a little tighter."

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