If you've been thinking about buying or selling a home anytime over the last three years you will be more aware than most of the impact of the recent crash in the housing market, but buying next year could be a good move.
The current low rates on mortgages are largely a result of the government's program of asset purchasing. Unless they decide to extend this program again, it is likely that we will see rates rising above 5% once more in the first quarter of the year. The Fed has also drastically reduced the rates of federal funds and is not expected to raise them until September. When the rates are increased this could affect mortgages with adjustable rates, but the effect on fixed rate mortgages will be small.
Should you decide to take out a mortgage you are going to have to meet the strict requirements now in place. You are likely to be asked for a FICO credit score of 730 or more, if you're aiming for the most attractive rates. It is a good idea to take a look at your own credit rating, which you can get through one of the main bureaus. You are entitled to a free report from them once a year. You may be able to improve your score if you spot a mistake. You can also help your application by providing full documentation of all your incomes and assets, since most lenders will want to see this before handing over any money.
The FHA offers loans without such stringent requirements. The credit ratings they accept have an average of 690, but you will be expected to pay more interest and cover insurance costs. Almost 30% of new homes are now being paid for using money borrowed from the FHA (3% in 2006). There are now plans to prevent some less reliable people from borrowing from the FHA, so the required credit rating is likely to go up, along with the size of down payments.
If you are thinking about getting a "jumbo" loan then you are at an advantage if you buy sooner rather than later. The rates at the moment are about as good as they have ever been, and are likely to remain fairly low during the whole of next year. Banks are not likely to offer you such an expensive mortgage unless you are a very financially suitable client, however. They will not be able to sell these loans to Fannie Mae/Freddie Mac, so they will be more cautious about offering them, as they know they are stuck with the risk. They will ask for down payments of between 20% and 40%.
In fact, this requirement for larger down payments is likely to affect all borrowers. The lowest you will be expected to pay is 3.5% on FHA loans, and when borrowing from other sources you are likely to be asked for at least 20%. If you are unable to come up with this much, you may still be able to get a loan, but you will only be offered it at higher rates of interest. Buyers who are unable or unwilling to comply with this requirement could see the expected down payments being reduced in 2010 if the market improves. This doesn't seem likely at the moment, and is only expected to happen towards the end of next year, if at all.
If the economy recovers well then the costs of mortgages will go up too. The fixed rates of thirty year mortgages will go up, since they depend on where investors are putting their money.
One thing to watch out for if you're thinking of buying is what happens with Fannie Mae/Freddie Mac. No one is sure quite what the future holds for these two influential companies, so look out for any announcements in the new year which could affect your mortgage.
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