In the last four years the lending requirements for buying a home have gone through major changes. All lending institutions have become stricter with their requirements for lending money. So it is more important than ever that you are aware of the basic current guidelines when pursuing a loan.
Lending was very different just four years ago. Until about 2007, banks were very lenient with regard to their lending requirements. There were many different loan programs, many of which were referred to as “creative financing”. This made it very easy for almost anyone to get a loan. There was 100 percent financing, which meant that the lender would loan 100 percent of the purchase price. There were negative amortization loans, which meant that the loan balance would increase during its lifetime, rather than decrease. There were adjustable loans, which meant the percentage rate of the loan would adjust in time. There were literally hundreds of different kinds of loans that lenders offered. Many of the loan programs were good, but many of them unfortunately were not in the best interest of the buyer.
A very good example of a very bad loan program was one that a good friend of mine obtained. She was a struggling artist who worked as a waitress. She had heard that “anybody” could get a home loan. So about six years ago when the lending requirements were very easy, she got prequalified with a lender and began shopping for a home. She found a home and successfully purchased it for just under $600,000. At first during her homeowner honeymoon, she was very happy and excited about owning her own home. But by the end of the second year, her adjustable loan had increased her monthly payments to a new amount that was more than she really could afford. She realized that she had bitten off more than she could chew and she was struggling to make the monthly mortgage payments. She put the house up for sale and it actually sold for more than she paid for it. She was able to get out from the financial responsibility and actually made a profit. This was a happy ending to what could have been a very bad one.
Many people were not as lucky as my friend and unfortunately lost their homes. But the point to all of this is that my friend, who qualified to buy almost a $600,000 home loan, should have never been qualified for such a large amount. What happened to my friend was very common. Lenders were utilizing the creative financing loan programs to get buyers into homes that they really could not afford.
Today the lending environment is very different. Lenders are very strict with regard to their requirements to lend money. Generally, the most important criteria that lenders look at today to qualify a buyer are listed below:
Credit rating
You must have a decent to good credit score today as a buyer to get a home loan. Your credit rating is now a major factor when you are trying to get prequalified. Credit ratings range from 350 to 850, the highest being the best. Lenders usually want to see a buyer’s credit score around 700 or higher. But there are many loan programs that will work for buyers with lower credit scores.
Income
You must earn enough income to qualify for a home. You do not need to make a ton of money to buy a home. However, you do need to be reasonable with regard to the purchase price as it relates to your individual income and financial situation.
Debt ratio
You must have a good debt ratio to get a loan. Meaning you cannot have high debt with regard to the amount of money you make. You can make an incredible income, but if you have high debt and owe lots of money, you may not qualify for a home loan.
Assets
It is helpful to qualify for a loan if you have some assets, such as owning a car that is paid off, or another property. This is another attribute that lenders take into consideration.
Getting a loan for buying a home is still a very wonderful and achievable goal today. Just make sure that you are not over extending yourself and that you are getting a good loan that you are comfortable with and that you understand. You can contact any bank, credit union or mortgage broker to get prequalified for a home loan. They can tell you how much you qualify for, what your estimated payments would be and they can answer any questions that you may have regarding the loan. Do not be afraid to get prequalified. It does not cost anything, and it is the first step to buying a home. Good luck prequalifying and happy house hunting!
Trent St. Louis is a licensed Real Estate Agent and a member of the National, California and San Diego Association of Realtors. He can be reached at trent@tns.net or at his office in Hillcrest, The Metropolitan Group. DRE#01273643.
