Mortgage Rates Plummet, But Borrowers Beware

[Purveyor]

NEW YORK (CNNMoney.com) -- Mortgage rates have plummeted, but that hasn't made getting a home loan any easier for most borrowers.

In the wake of the government's takeover of Fannie Mae and Freddie Mac last weekend, the 30-year fixed rate has dropped from 6.26% last Friday to 5.79%. But only buyers with a credit score of 740 of above - and a 20% down payment - can qualify for such a low rate. During the boom, borrowers only needed scores of 640 to land the lowest rates available. Even a 580 score would get them very close to the best rate.

During the credit crisis, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to lend is crucial to the housing market. To that end, the Treasury will buy mortgage-backed securities from the two firms, and lend them money if necessary, all in an effort to make credit more available to home buyers.

But that doesn't mean that lenders won't continue to subject borrowers to strict criteria, according to Keith Gumbinger of HSH Associates, a tracker of mortgage loan information. The aim is to make mortgages more available, but only to the most qualified borrowers.

"All the emphasis on credit scores is not going to go away," he said.

High score, low rate

As the housing market has imploded, lenders have battened down the hatches on mortgage underwriting, consistently raising the credit scores necessary to qualify for the most favorable terms, and adding to borrowing costs to compensate for any extra risk factors they find. That's not going to change.

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CNN MONEY: http://money.cnn.com/2008/09/08/real_estate/high_credit_scores_a_must/index.htm