The housing crash of 2007 and 2008 financial crisis impacted the world of mortgage lending in a substantial and profound manner. In the early years after the national economic downturn, banks reeled from insufferable losses. Hundreds of millions of dollars were lost in defaulted small business loans, private student loans, auto loans, and of course, mortgage loans. Congressional and regulatory action was taken and it getting a home loan became quite difficult. Now, standards are loosening in a way that’s more consumer friendly.
Getting Your Finances Ready for a Mortgage
Home loans are being approved with only 3 percent to 5 percent down payments, more products are being offered, and, credit file scores are recalculated with less emphasis on medical bill debt. Though we’re nowhere near the stated-income, interest only debt instruments so common years ago, there are more options available to would-be home buyers. With marriage equality finally resolved, same-sex couples are beginning to see new ways to own a home together.
“You’ve been diligently pinching pennies to save for a down payment and after countless hours of drooling over online “For Sale” listings, you’ve decided it’s time to make your dream of owning a home a reality. But is your credit mortgage-worthy? To find out, you’ll need to meet with a loan officer to see how much of a mortgage you qualify for and at what interest rate. 5 ways to get your credit mortgage-ready But after sitting down and going over your finances, you may discover that instead of penny-pinching and dreaming, you should have been working on building up a more positive credit rating. The lender may shake his head and say you need to improve your credit before you can qualify for a mortgage. —Credit Cards.com
Although this is welcome news, it doesn’t mean obtaining a mortgage is a cinch. Banks are still risk adverse, and, your finances must be in-order to qualify for a home loan. If you take the time to properly prepare, you’ll do yourself a tremendous favor. Here are some helpful tips on getting your finances ready for a mortgage:
- Examine your debt-to-income ratio. When people think about getting a mortgage, they typically think about their credit score as the determining factor about their qualification prospects. While your credit score is important, it won’t make your DTI go away. This is the ratio is the difference between your gross monthly income and monthly obligations such as credit cards, auto loans, student loans, and so on. Your DTI ought to be under 35 percent in most cases.
- Save as much money as you can. While you might not have to bring a down payment of 20 percent to the closing table, you’ll probably still have to make a down payment ranging from 3 percent to 10 percent, depending on the mortgage product and your finances. You’ll also need money for a good faith deposit, inspections, closing costs, and more.
- Request copies of your credit files. Go to Annual Credit Report.com and request copies of all three credit files from reporting bureaus, Experian, TransUnion, and Equifax. This is free once per year and gives you the ability to find inaccuracies and mistakes and correct and dispute these. Take the time to clean-up your credit file and it will be worthwhile.
- Look over the short term of your career. Even if you have a good credit score, a good income, and money set aside, if you are going to be changing careers about the time you buy a home, it could cost you the home loan.
In addition to all of these steps, be careful with what you do with your credit practices. Don’t open new lines of credit, increase credit lines, or, make new purchases on existing credit lines.