How Will the U.S. Downgrade Affect Mortgages?

Mortgage rates vary based on current economic factors, which is why many people are wondering how S&P's downgrade for the U.S. on August 5, 2011 will change home loans. While no one can predict the exact outcome for this momentous occasion, the following information may help consumers who are planning to buy a home.

Contributing Factors to the U.S. Downgrade

Standard & Poor is an organization that accesses the credit risk of nations. Its highest rating is the triple-A category, which allows nations to borrow money at lower rates. This works in a similar fashion to an individual's credit score. However, politics can affect the national ratings, whereas they do not affect individual ratings.

In the case of the U.S., S&P began warning of a drop in the credit rating in the summer months of 2011 based on two factors: the U.S. debt ceiling and the lack of political agreement detailing how to handle the debt crisis. Presumed volatility led the organization to lower the U.S. from AAA to AA+.

Standard & Poor's Downgrade

On Monday, August 8, 2010, the U.S. stock market took a 634-point hit. Unlike the economic downfall of 2008, the decrease wasn't the result of companies reporting major losses from one quarter to the next. This means that the decline has more to do with panic selling than economic troubles for major U.S. businesses.

If you compare the economic situation of 2008 to that of 2011, you'll see that panic selling is actually good news. During the 2008 financial meltdown, the issues occurred because U.S. businesses, such as mortgage companies, were failing. That isn't the case with the current downgrade.

Additionally, S&P is only one rating organization, and two of the other major rating scales have not lowered the U.S. rating. Moody's and Fitch have not lowered the U.S. from its triple-A rating with their organizations.

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The Federal Reserve's Response to the Downgrade

Most financial experts agree that the downgrade shouldn't have a lasting effect on the United State's economy; however, the Federal Reserve took measures to help avoid an economic crisis, which it expressed in a press release on August 9, 2011. The Federal Reserve stated that it would be keeping its interest rate near zero through the middle of 2013.

Will the Downgrade Affect the Housing Market?

If you know the factors that affect home loans, you know that interest rate plays an important role. Most mortgage companies base their interest rates based on the Federal Reserve's prime rate. Since the Fed is keeping its rate low, U.S. financial institutions will be able to borrow money at a lower rate, which allows them to offer different types of home loans to consumers at low rates. That means now could be the best time for you to look into getting a mortgage.

If you still aren't sure about this, consider how banks operated during the economic crisis. While lenders took less risk, they still funded 15-year and 30-year loans for homes. That's a trend that will continue. The Mortgage Brokers Association estimates that the economy will continue to recover with a 3-percent growth in the second half of 2011. The low rate should continue to fuel refinance options for existing mortgages.

Tips to Getting a Home Loan for 2011 – 2013

If you plan to buy a home, you'll need to make sure you know what a mortgage lender will expect. The following things can boost your odds of getting approved for a home mortgage:

• Have 20 percent of the home loan as a down payment.


• Consider adding extra money to your down payment to buy mortgage points.


• Document your income and your assets. If you are self-employed, expect to need tax returns from the previous three years.


• Keep your credit score as high as possible. Banks will be offering the best rates to consumers with scores over 730. While they may fund loans at lower scores, this will increase the interest rate.


• Manage your debt-to-income ratio. Banks won't rely solely on your income and assets to approve a mortgage. If your debt-to-income ratio is too high, it may prevent you from getting a bank's approval.

Finding the Right Home Loan

Banks need business to stay in business. While the economy may tighten purse strings, now is a great time to take advantage of low purchase prices and low interest rates, especially for people who have the financial stability to buy a home. Find out which type of mortgage is the best option for you with our mortgage calculator.