6 Mortgage shopping myths

Mortgage shoppers hear many strange tales about the home loan-shopping process. Here are 6 common myths about shopping for a mortgage and the facts you should know:


Myth: Shopping for a mortgage loan will hurt your credit score.

Fact: Credit scoring companies know most people want to shop around for a mortgage or car loan. That’s why their formulas allow a window of time during which multiple inquiries about your credit will be counted as only one inquiry. If you stay within that window, you don’t have to worry about shopping for a loan from multiple lenders. (For more information, read the LendingTree article Credit Inquiry FAQ or “Credit Inquiries” on myFico.com.)

Myth: All lenders sell your personal information to telemarketers.

Fact: When you apply for a loan and the lender checks your credit history, the credit reporting company may sell your name and telephone number to other lenders. These names and telephone numbers are known as “trigger leads.”

If you’re shopping for a loan and don’t want to become a trigger lead, you can submit a form online at OptOutPrescreen.com. This will help to keep your information private and ensure the credit bureaus won’t sell your information as a trigger lead.

Myth: Everyone can qualify for the low interest rates advertised on television.

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Government offers mortgage help

New government programs may be good news for homeowners who want to refinance or obtain a loan modification.

Homeowners who want to refinance their mortgage or need help to obtain a loan modification may be cheered by several recent federal government announcements.

The Federal Reserve said it will keep the benchmark federal funds rate at zero to 0.25 percent. The low target rate is good news for borrowers who have an adjustable-rate mortgage (ARM) or want to refinance, even though the Fed doesn't directly control the interest rates that borrowers pay on their loans.

These low interest rates may not be fleeting. The Fed said it expects "exceptionally low" rates to continue for "an extended period" due to current economic conditions. That's good news for buyers who need time to shop for a home and a loan.

The Fed also reiterated its plans to buy up to $1.25 trillion of mortgage-backed securities, $300 billion of Treasury securities and $200 billion of other debt instruments this year. These purchases are intended to "support to mortgage lending and housing markets," among other objectives, the Fed said in its statement.

Second loans to be modified
Meanwhile, the U.S. Treasury announced a new Second Lien Program that will lower the payment on some homeowners' second mortgages. This program is intended to help homeowners who are in danger of foreclosure qualify for a loan modification through the Making Home Affordable program. Second mortgages can create significant challenges in these situations.

The Making Home Affordable program also has a refinance component that's open to borrowers whose loan is owned or guaranteed by Fannie Mae or Freddie Mac. Through this program, homeowners may be able to refinance even if they owe slightly more than their home is worth.

A dozen or so lenders have signed formal agreements to offer the Making Home Affordable programs.

Loan principal may be reduced
The Treasury also announced a program that would require loan servicers to offer the existing Hope for Homeowners program to more borrowers who apply for the Home Affordable Modification program. Hope for Homeowners is a government program that helps to create equity for homeowners, so they can refinance into a new loan that's guaranteed by the Federal Housing Administration (FHA).

Home buyers score tax credit
For home buyers, the federal government offers an $8,000 tax credit. The credit can be taken by taxpayers who purchase a home between Jan. 1, 2009, and Nov. 30, 2009, and have not owned a home in the last three years. The credit does not have to be repaid and can be claimed on the taxpayer's 2008 or 2009 tax return. The credit is subject to income limits and is phased out for higher-income earners.

Qualifying to refinance your mortgage

There's no doubt about it: Lenders have tightened the guidelines they use to evaluate loan applications. That means borrowers who want to refinance their mortgage to take advantage of low interest rates may wonder whether they will qualify for a new loan. This summary should help you understand what lenders look for when they evaluate mortgage refinance applications:

How much you make and how much you owe
Lenders weigh your monthly income and debt payments through a debt-to-income (DTI) ratio. Conventional wisdom is that lenders look for a DTI that's no more than 38 percent. However, some programs are more flexible and allow a larger DTI ratio.

DTI is a complicated calculation, so you should discuss your income, debts and housing costs with at least a few lenders to determine if you’ll qualify to refinance your mortgage. If you have a high debt-to-income ratio, you may want to concentrate on paying off some of your debts prior to refinancing.

Also keep in mind that most lenders will require that you document your income with recent paycheck stubs, W-2 Forms or federal income tax returns.

How much you want to borrow and how mch your home is worth
Another factor that contributes to whether you can qualify for a mortgage refinance is your loan-to value (LTV) ratio. To calculate your loan-to-value ratio, divide the amount you want to borrow by the current value of your home. For example, if your home is worth $250,000 and you want to borrow $210,000, your LTV is 84 percent.

Most lenders look for a loan-to-value ratio of less than 80 percent to refinance. However, again, some loan programs are more flexible.

One example is the new Making Home Affordable program, which allows refinancing with up to 105 percent LTV. This program is open to borrowers who have a good track record of making their mortgage payments and whose loan is owned or backed by Fannie Mae or Freddie Mac.

A second example is the streamlined refinancing program offered by the Federal Housing Administration (FHA), which doesn't require an appraisal. This program is open to borrowers who have an FHA-insured loan.

Have you paid your bills?
Your credit score also can be an important factor in your ability to qualify to refinance your mortgage. While there is no specific minimum credit score that you'll need to refinance, keep in mind that if your credit is impaired, the interest rate and terms you'll be offered might not make refinancing an attractive option. If you have a strong credit score (and a good track record of paying your bills on time), you'll likely be offered a lower interest rate and better terms.

Remember, lenders will look at a combination of the factors mentioned above —your debt-to-income ratio, loan-to-value ratio, and credit history—along with other aspects of your financial situation to determine whether you’ll qualify to refinance your mortgage. Either way, it is best to speak directly with a lender or multiple lenders to determine your options. You can get no-obligation rates and offers from multiple lenders through LendingTree.

Also keep in mind, if you do qualify to refinance, you should still consider whether refinancing makes sense for you. The free LendingTree refinance calculator can help you figure out how long it will take you to recover your refinance closing costs through a lower monthly mortgage payment.