Image: House for sale
Gene J. Puskar  /  AP
Getting a low mortgage rate to buy a house can be arduous. Fannie Mae and Freddie Mac now have the strictest qualifications in more than a decade.
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updated 10/24/2011 5:24:49 PM ET 2011-10-24T21:24:49

When Cynthia and Gerald Matthews relocated from Ottawa to Bloomington, Ind., house hunting had some pleasant surprises. “It was much cheaper than we thought it would be,” says Cynthia Matthews, who bought a three-bedroom, brick neocolonial-style house for 5 percent less than the $196,999 asking price and got a mortgage rate close to 4 percent. “To say it’s a buyer’s market would be an understatement.”

People like the Matthewses who survive the scrutiny of mortgage lenders are getting the best deals of the five-year U.S. housing bust — and perhaps the best deals of a generation — after a 31 percent decline in home prices since 2006. It’s the bright side of an otherwise bleak real estate market: Good houses at cheap prices are plentiful, and mortgage rates are at record lows — an average of 3.94 percent for 30-year loans during the first week of October.

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“It’s hard to see the possibility of losing on a home purchase right now, with these mortgage rates,” says Dean Baker, an economist who in 2005 predicted that house prices would tumble. “Prices may go lower, but not by much.”

Buying a $300,000 home with a 4 percent mortgage means a monthly payment of $1,145, assuming a 20 percent down payment. The Mortgage Bankers Assn. predicts that prices may decline an additional 3.5 percent by mid-2012, while mortgage rates will increase by a half-point. If that proves accurate, that home would sell for $289,000, while the monthly mortgage bill would be $1,171. “Even if there is another recession, people who can qualify for a mortgage won’t gain anything by playing the waiting game,” says Nariman Behravesh, chief economist at IHS in Englewood, Colo.

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Getting those low rates can be a grueling process. Fannie Mae and Freddie Mac, which securitize about two-thirds of new U.S. mortgages, have enacted the strictest qualification standards in more than a decade as they try to improve the credit quality of their portfolios.

Christine Trendell bought a house two months ago in Canton, Mass., a suburb of Boston, where real estate prices fell 25 percent through early this year before gaining 10 percent in the recent quarter, according to the National Association of Realtors. The wood-shingled house, built in 1920, has a screened-in front porch. Trendell and her husband had to submit a pile of bank statements, retirement-fund tallies and years of tax returns that stacked almost two inches high, she says. The lender required them to fax their pay stubs repeatedly near the end, she says, to make sure they still had their jobs. They were able to get the mortgage because they have pristine credit records, she says. “The low rates made it affordable to buy the house, but we didn’t know if we were going to be able to get a loan,” says Trendell. “Rates don’t matter if you can’t get a mortgage.”

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Buyers are still cautious about taking advantage of deals. Sales of previously owned homes were down 31 percent in August from their 2005 peak, according to the NAR. Neither economist Baker nor Karl Case, co-founder of the Case-Shiller home price index, expect property bargains to be a cure-all for the worst housing collapse on record. Says Case: “Houses are cheap right now, but a lot of people are too scared to buy, no matter what kind of deal they get.”

The bottom line: Home prices down 31 percent since 2006 and mortgage rates averaging 3.94 percent mean bargains for buyers with good credit ratings.

Copyright © 2012 Bloomberg L.P.All rights reserved.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.38%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.40%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.87%
10.87%
Cash Back Cards 16.36%
16.33%
Rewards Cards 15.94%
15.90%
Source: Bankrate.com