When the Low Rate Is Out of Reach

Mortgages are cheap, but many borrowers can't qualify for the best rates—or get a loan at all. Here's how to tilt the odds back in your favor.

By Sarah Max
For some would-be buyers and refinancers, today's mortgage rates are the ultimate tease.

Loan (Photo credit: Philip Taylor PT)

 While ads tout the lowest rates in history (recently under 4% for a 30-year fixed), qualifying for a mortgage that cheap can be an exercise in frustration or futility. Less-than-perfect credit will hurt, of course, but you may also find yourself struggling if your situation is deemed at all unusual—which could mean anything from owning a business to buying a condo instead of a single-family home. Read on for the best ways to get a deal.

Problem: You're self-employed.
Solution: Give up deductions.
Business may be booming, but don't expect the bank to take your word for it. If you haven't run your own shop for at least two years, you probably can't get a loan. Assuming you meet that hurdle, banks will use the average income on your past two tax returns or the most recent, whichever is lower, when determining the amount you can borrow and the rate on your loan. Try deferring or forgoing deductions, such as those for new equipment or travel, on your 2011 tax return, says Denver mortgage broker Todd Huettner. While that will up your tax bill this year, it may be worth it to nab that lower mortgage rate (lenders won't penalize you for IRA contributions and health-care write-offs).

Also, ask your business contacts for the name of a mortgage broker who knows your industry. A savvy broker should shop around with private lenders—that is, ones who don't resell loans via government agencies and aren't held to their restrictions—since they may give you more wiggle room.

Problem: You've lost equity.
Solution: Pay a fee or take a look at government programs.
If you're trying to refinance and have less than 25% equity, you may have to pay a quarter of a percentage point of the loan to get the lowest rate. As long as you plan to stay in your home a while, it's probably worth paying, says Rick Allen, chief operating officer of loan information site Mortgage Marvel.

Owners who are underwater can ask a lender about the government's revamped Home Affordable Refinance Program (HARP), which is slated to have no loan-to-value limits as of March 11, 2012, says Bob Walters, chief economist for Quicken Loans. To qualify, you must have taken out your loan before June 2009 and be up to date on your mortgage payments.

Problem: You're buying a condo.
Solution: Check the development's finances before you bid.
In many places condo prices have fallen more than those for single-family homes. But for you to get a federally insured loan on a condo, the development must meet strict criteria: 70% of units in new condos must be presold, no more than 10% of the development can be owned by a single entity, and no more than 15% of owners can be more than 30 days late on their maintenance.

A private lender may cut you some slack, but your loan rate will probably be two to three percentage points higher. So find out the details of the development up front. You may be better off buying in a building that meets the criteria for a federally backed loan, even if the property is more expensive, vs. taking a chance on one that has better days ahead (you hope).

Problem: Your credit isn't squeaky clean.
Solution: Fix it, explain it, or get an FHA loan.
The average credit score for a federally backed loan was recently nearly 760, the highest ever. A score of 720 vs. 760 can raise your rate by a quarter of a percentage point. So check your reports (free at AnnualCreditReport.com) and scores from all three credit bureaus ($10 each at MyFICO.com), and correct any errors before you shop for a loan.

If the blemish on your credit is a result of bad luck (illness or job loss, for example) rather than bad habits, a private lender might make an exception, says Huettner. Or run the numbers on a Federal Housing Administration loan, which requires only a 580 score. You'll pay a point up front, plus an annual premium of about 1.1% of the loan value for the first five years, but you're likely to get a better rate than you would with a traditional loan.

The information contained herein represents the opinions of a third party and does not necessarily represent the opinions of Naperville Tax Advisor, Susan S. Lewis or Platinum Financial and are unaffiliated with any of the entities referenced above.

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