Mortgage market: What you need to close a loan

Mortgage rates have spiked recently, which prompted me to call my pal Mortgage Mike (Mike Raimi, President of WCS Lending) for an update on what’s cooking in the mortgage market. “Over the past two weeks rates have jumped by a half of a percent across the board. While that’s a big move in a short time, it still seems kind of crazy to talk about how 30-year fixed-rate mortgages on conventional loans are averaging as much as 4 percent. After all, from a historic perspective, 4 percent is still an awfully low rate.”

To help you gain that perspective, this chart clearly demonstrates how a 30-year bull market in bonds has pushed down mortgage rates to current levels.

Still, the idea of landing an even-better deal often undoes borrowers, even when rates are at these low levels. Mike told me a story to illustrate the point. A little over two weeks ago, he had a client who was refinancing a $320,000 30-year mortgage, which carried an interest rate of 4.5 percent.

“The new rate was 3.375 percent, but the client wanted to hold out for 3.25 percent.” The difference in monthly payment on the loan was $23 per month, so Mike encouraged the guy to grab the 3.375 percent and to not look back. The client balked and said he would wait for 3.25.

Guess what? He never got 3.25 percent! Instead, when he called Mike this week, the rate had jumped to 4 percent, which meant the re-fi didn’t make as much sense. In other words, it’s just as hard to time the mortgage market as any other market!

What do you need to know about attaining a mortgage now? “The process has improved from a year ago, but it is still labor intensive. Borrowers need patience and perseverance” according to Mike. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 45 to 90 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed, unless you qualify for the government’s HARP plan. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

If you are preparing for the mortgage process, here’s what you will need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can "add-back" tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack - the numbers on the return are set in stone.