How to Navigate Stricter Mortgage Lending Guidelines

Six tips to help you prepare for a home purchase

Now is the ideal time to purchase a home. Interest rates are at historic lows and home prices are still lower than they’ve been in years. But, now that credit guidelines are stricter, some potential homebuyers may be wondering how to navigate the new environment. Rob Robertson, retail sales manager with Wells Fargo Home Mortgage in Alpharetta, Georgia, says the guidelines are now where they always should have been. “A lot of people may have bought prematurely,” says Robertson, alluding to the freewheeling pre-recession days of alternative documentation options. “Others may have bought more house than they could afford.”

Here are six things you should know before you close.

 

  1. You need a credit score of at least 600 to get a loan approval, but 700 gets the best rates.  “Lenders are looking for borrowers who are truly qualified to buy,” says Robertson. “Even after you’ve been pre-approved, don’t buy a lot of furniture or anything on credit, because if the underwriter audits your credit report before the closing, your approval can be rescinded.”
  2. Have a down payment of at least 20% of the home’s purchase price.  Banks aren’t offering the zero-money-down loans they once did. Many won’t consider loans to buyers with less than 20% down. If you don’t have the 20%, you still have the option to apply for an FHA loan, in which case, a down payment of between 3.5% and 5% will do.
  3. Use a real estate professional who has your best interests at heart. “Listen to other people, but don’t react,” advises Robertson. “Other people may be buying a huge house with a media room, but you need to know your price range and stick with it. Don’t let a real estate agent talk you into more house than you can handle.”
  4. Keep your money story straight. What you report to the Internal Revenue Service is generally what lenders will use as your income. So, if you deduct expenses for which you’re not reimbursed by your employer, the lender may also exclude that amount from your income. Make sure your tax returns, W-2 forms, pay stubs, etc. are in sync. Also, don’t move money around in your bank accounts. You must be able to prove where the money comes from. That means irregular income or any income that cannot be sourced, like tips or some freelance compensation, will not be considered.
  5. Know your debt-to-income ratio. Different lenders handle this differently, but Bankrate.com says this number may be as important as your credit score. To calculate your debt-to-income ratio, divide your total recurring debt by your gross income. You want your number to be low, unlike with a credit score. Generally, a debt-to-income ratio of 36% or below—aim at 30%—should help you qualify for a loan.
  6. Educate yourself. Attend home buying seminars in your community, consult reputable websites, and read widely. Keep reading BLACK ENTERPRISE and frequenting our website, where you’ll find advice on debt management, smart financial moves, and savings strategies.

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