In 2006, the mortgage market hit a boom. It seemed at that point it took very little to qualify for a home loan, and it did. There wasn’t much that stood in the way of a potential purchaser and the approval stamp. However, since the foreclosure crisis, economic down turn and a very bleak look at the housing market in the next several years, mortgage lenders have changed the rules substantially, tightened the guidelines and reduced approvals for consumers and home loans. Know the rules before you shop the rates. This is what it takes to qualify for a home loan in 2010.
Few things in this particular category have changed. Home buyers need to provide proof of employment and a steady income. Typically this means two months of pay check stubs and bank statements.
For self employed workers or independent contractors, they will have to provide at least two years worth of income tax returns and bank statements to verify income.
It is in this category that many lenders have buttoned down on the restrictions. A rule of thumb is that a consumer’s debt cannot exceed 30% of their income. For example, in a household that makes $100,000 annually, they cannot carry more than $30,000 worth of total debt. This debt includes items like: car payments, credit card payments, student loans, and any other recurring payment.
For most Americans, who on average carry between $40,000 – $50,000 worth of debt this qualifying guideline can be the first difficult hurdle to overcome. Because of this, many consumers are turned away for a mortgage until their debt is paid down.
However, this is not always bad news. There are two ways to decrease your debt to income ratio very quickly. The first is quite obvious; pay the debt off or down. The second is to call the creditors and ask them to increase your limit on credit cards or personal loans. What this will do is help a consumer show a higher “available” credit, making the bank feel more comfortable with a higher debt load.
Credit histories have always been important when it comes to getting financed for a home. However, since the mortgage bailout crisis in 2009, the rules have changed for credit as well. If a consumer holds less than a 620 credit score, they are automatically denied for a home loan. Long gone are the days of sub-prime lending.
In addition to this, consumers cannot have had any major derogatory items on their credit in the last 12 – 24 months. That means, no collections, no missed payments, or no late payments. Should any of these things exist on a consumers report, if they are not able to explain and quantify the reasoning behind it, they will not be approved for a home loan.
Money for Move In
In the housing boom of 2006, most banks didn’t blink and eye to how much money you had in your bank account. Nowadays, the money you have available for move in and closing costs must also be supplemented with proof that you have enough in reserves to make your first mortgage payment after closing. Should you not have the available funds, you could have a problem with closing on your dream home.
The best thing to do before applying for a home loan is to check your credit history. Visit www.freecreditreport.com and order a free credit report. For a credit score check up, sites like www.creditkarma.com are free and easy to use. These can help consumers navigate the murky waters of the mortgage lending process.