Right now mortgage rates are really low – the lowest they have been in 50 years – but there are very few potential buyers actually getting those low mortgage rates or qualifying for a mortgage loan at all.
I have many eager consumers asking, “Why can’t I qualify for a mortgage right now?”
After the housing bubble burst in 2007, mortgage lenders were blamed far and wide for the fallout when evidence of industry wide no doc or minimal documentation loan practices were uncovered.
Fast forward to 2012 and the housing market has improved and is even on the upswing. However, to learn from past mistakes, the federal government as well as the mortgage lenders themselves have instituted much stricter guidelines for mortgage loan approval. Many who thought they were well qualified are being denied.
Here’s why:Â Tighter standards and more oversight means more documentation.
Even though demand for home loans has increased, few lenders are easing credit standards. Applicants are facing more demands to prove income, verify assets, and show steady employment. Potential buyers are needing higher down payment amounts and even then they are having a hard time getting to the closing table. Also, the entire process is taking longer (as long as 5 to 8 months) with constant documentation requests including providing pay stubs every two weeks up to and until closing.
In addition, the Consumer
Financial Protection Bureau is considering more permanent mortgage servicing rules (slated for 2013) that would supersede the foreclosure fraud settlement standards and put a constant and consistent eye on the mortgage origination and servicing process. With everyone now looking over their collective shoulders in the wake of the housing crash, lenders are not taking chances on possible defaults.Consumer spending habits
Years ago when anyone with a pulse could get a mortgage loan, the primary documentation needed was proof of income, just prove you could make the payments. Consumers were also spending more and saving less which led to some poor financial choices. As a result, the credit report has reared its head again
because you may make the money, but the credit report actually shows how you spend it. And its not just the credit score, it’s the debt to income ratio, new credit accounts or past delinquencies that will result in a quick denial of a mortgage application.The idea here is that higher standards will result in fewer defaults and foreclosures in the future.
Put yourself in the best position to qualify
If you know you are going to apply for a mortgage loan in the near future:
1.) Get that debt to income ratio down (no maxed out credit cards or unnecessary revolving debt).
2.) Don’t open any new credit accounts right now.
3.) Clean up anything that is delinquent on your credit report and have a good explanation (in writing) ready.
4.) Documentation, documentation, documentation. Have it all in order and ready to produce. This would include at a minimum, two years of tax returns, bank statements, pay stubs or proof of income, retirement income information etc. Lenders will ask for what they need based on your specific situation.
Take a moment and look at yourself from the other side of the banker’s desk.
Would you take a risk on you?
Jennifer Streaks, MBA, is a financial expert, author and pundit. Her up-to-the-minute financial articles appear on The Motley Fool network. Follow her on Twitter @jstreaks.