When Applying to Freddie Mac or Fannie Mae, the Rule is You Need Good Credit and a lot of Cash

When the housing bubble burst this past fall and the government had to bail out Freddie Mac and Fannie Mae, getting a loan for a new home became just a little harder for homeowners. With the two largest lenders being in a government conservatorship, rules have tightened to reduce the risk to mortgage lenders. Potential homeowners should now be prepared to offer large amounts of cash for a down payment and be able to prove that they have a good credit score. This is the new reality in these hard economic times.

A recent article in the Wall Street Journal estimated that buyers need approximately 20% cash down plus a credit score of 740 to qualify for a low down payment. With a credit score and cash on hand like this, a buyer could qualify for a mortgage with an interest rate of 4.75% plus origination fees. If your credit score is lower, count on having to put down more cash plus spending a lot more in fees.

With private institutions not keen on making mortgage loans in the current financial climate, Freddie Mac and Fannie Mae may be the only avenue to turn to for a mortgage for many home buyers. Potential homeowners need to be prepared to part with a lot of cash in terms of a down payment in order to qualify for a mortgage. The FHA is still working with people who have poor credit, but there is not a lot of mortgage money to go around. The best way to get a mortgage is to have a good credit score and to have plenty of cash on hand to make a down payment and pay the fees. There’s just no way around the new rules at the moment.

The housing market collapse has created a glut of homes that are waiting for buyers, but low selling prices have scared off sellers. Economic experts have said that there is a need to balance safe lending with stabilizing the housing market. Many people are applying for mortgages and are being turned down because they do not have a lot of cash on hand to make a down payment or they don’t qualify due to bad credit. This is creating an economic catch 22 where there isn’t enough money to lend to prospective buyers and there is a backlog of homes waiting to be sold.

While things probably won’t change in the short term, there probably needs to be some loosening of the purse strings and willingness to take on more risk by Freddie Mac and Fannie Mae to get more people qualified for mortgages. People will need to realize that no matter what, good credit and a lot of cash may be the order of business for getting a mortgage and buying a home today.