Mortgage Rate News

Image via Wikipedia

Recently, I received a question from a reader. It was pretty straightforward:

Is it really harder to get a home loan now?

There have, of course been stories about the difficulties surrounding qualifying for home loans, and many people are wondering if, perhaps, the concern is a bit overblown. While things have eased a bit more now, it certainly is harder to get a home loan now than it was three years ago. The main reason is that, learning from their mistakes, mortgage lenders have tightened lending standards, which means that — by definition — fewer people are going to qualify for a home mortgage loan.

Tighter Lending Standards

Whenever you go to get a mortgage loan, you have to provide documentation about your income, credit history and other items to help the lender determine what sort of a risk you are. They want to know that you are likely to pay back the mortgage. Before the financial crisis, lenders didn’t care much about this information. Nearly anyone could get a home loan, and products like interest only loans and teaser rate loans meant that people could buy a bigger house (with a bigger loan), since the initial monthly payment was low. It looked like they could afford these house, when they really couldn’t.

Now, things are different. Mortgage lenders have higher standards. Here are some of the things you need now in order to get a home mortgage loan:

1. Higher credit score: In most cases you need at least a 650-680 in order to get a loan. For a good rate, you need between 720 and 740. A good credit score is harder to come by these days, though, because credit card issuers have been cutting credit lines and closing accounts, impacting scores.
2. Proof of income: Mortgage lenders are going back to the 28/36 qualifying ratio, and requiring you to show proof of income — proof that you can afford to make the mortgage payments. And many of them require proof that you will be able to make payments after the mortgage interest rate resets.
3. Down payment: It used to be that you could get a loan without a down payment. Now you need to save up. A FHA loan requires only a 3.5% down payment (10% down if you have less than 580 credit score), but if you don’t get a FHA loan, you might need to have anywhere between 5% and 20% down. With today’s home prices, that’s a pretty big chunk, and that can prevent some from getting a home mortgage loan.

However, those who have good credit, and plan ahead to save up for a down payment on a home they can afford, shouldn’t have too much trouble getting a home mortgage loan.