Buying a home is worlds away from just a few years ago. In 2000, approval rates were around 90 percent. Today, the home loan approval rating has fallen to a mere 30-40 percent. While decreased access to credit is a by-product of the recession (largely caused by lax lending and the ensuing defaults) and the subsequent financial reform, it doesn’t change the fact that one of the following situations may prevent you from buying a home:
1. CREDIT SCORE REQUIREMENTS: Today, a minimum credit score of 600 is required to get a federal home loan, with a minimum credit score of 700 being required by many lenders. These credit score requirements are more than 10% higher than they were five years ago. If your credit score is below these thresholds, you will not be approved for home financing.
2. AWARDED RATES: Further, within qualified credit scores, there is a greater disparity in interest rates awarded; whereas before the Great Recession, home loans had a range around 5%, the difference between someone with lower credit (i.e. 700, just qualified) compared to someone with a credit score over 775 can be as much as 10%, or more, depending on the lender. As such, just because you qualify, it does not mean you will receive a rate with which you can afford.
3. GREATER SCRUTINY: Moreover, in today’s economy, you not only have to prove your likelihood of repaying the home loan (which is essentially what your credit score measures), but you will face greater scrutiny as to your income and assets. Specifically, you will have to prove the value of your assets and your level of income. This may sound straightforward enough but for those funding the purchase of a home through a large bonus, using an asset to secure the loan, or who generate a large amount of self-employed income, this fact could preclude loan approval.
4. BORROWER REQUIREMENTS: In addition, today’s borrowers are required to have a larger down payment. Gone are the days of $0 down home loan financing. Many lenders now require a 20% down payment. Borrowers are also expected to have a debt-to-credit ratio under 35 percent.
5. HOME APPRAISALS: Lastly, home appraisals can affect your ability to buy a home. A high rate of foreclosures and short sales drives the appraisal value of properties down – in some cases so low that a potential lender may feel the home is overvalued for the price and deny your application, even if you meet all other requirements.
Although these 5 barriers exist, this does NOT mean you can’t buy a home. Talk to us today. Interest rates are still at near historic lows, and there is less competition on the market shopping for homes these days, meaning you have less competition bidding on a home you may be interested in, making now an excellent time. Check with us to see if you are “loan-qualified”.