In general, you would think that a period of sustained lower interest rates would be a good thing for borrowers. And in general, it is. But for many, this period of low rates has caused frustration and not materially changed their lives for the positive. Many have been locked into older, more expensive loans and not been able to refinance or sell their existing home to buy a smaller, lower-cost home.
Credit scores are a big cause for not being able to secure a great rate. If your score is too low, forget about it. If you have a score over 675 or so, you may get an offer but it will not be at the lowest rate published. For scores above 725, you may qualify for a great rate that you see advertised. I applaud the industry for coming up with an objective standard, but it too has problems. According to a recent report released from The Federal Trade Commission, as many as 25 percent of all FICO scores may contain an error that negatively impacts their personal score.
Even worse, good luck fixing it! There are reported methods for correcting a problem, but getting it done and properly reflected on your credit report is probably harder than getting an appointment with Ben Bernanke.
Mortgage underwriting has also changed. Since the days of liar loans, it is a good thing that mortgage underwriting has tightened up. But it has tightened so much, that even a great credit score may not qualify you for a new loan. I’ve seen two families declined for a new mortgage that would have qualified quite easily at just about any other time in history. One is retired, and regardless of their cash balance or equity in real estate, the lack of a job and a weekly pay check caused them to receive a declination. Similarly, a wealthy business owner client with no debt and several million of investable assets was declined because his company showed a loss in the prior year.
As tough as mortgage underwriting is today – it may be getting even tougher. The plan is to let the market dictate rates and underwriting standards as opposed to the government backed entities of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan mortgage Corporation). As these entities’ role diminishes, and the private sector takes over, the mortgage market will change again. Underwriting will stay tough, and maybe even get tougher. Rates may rise for all borrowers, but especially for those with less than stellar credit.
For those where a new loan would be helpful, seek advice and clean up your credit situation before you run out of options.
John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at email@example.com or on Facebook as JohnPNapolitano.