Mortgage loan officers have gotten plenty of blame for the housing crisis. The consensus is that they gave out too many mortgage loans to too many borrowers who didn’t have the income levels or credit histories to justify owning a home.
Today, mortgage loan officers are far more cautious than they were during the housing boom that lasted from 2001 through part of 2006. Today, borrowers better be able to prove that they have the income to pay their monthly mortgage bills and a history of paying their other bills on time.
Those that can’t do this? These borrowers might be better off rebuilding their credit and boosting their monthly incomes before applying for mortgage loans.
The Credit Home Buyers Need
Today, borrowers’ credit scores are the most important factor in determining whether a mortgage company will lend money. Credit scores, which are kept by the big three credit bureaus of Equifax, Experian and TransUnion, generally range in value from 300 to 850. The higher the credit score the better, with scores in the middle to higher 700s meaning that borrowers have excellent credit. Having a high credit score is important. Not only do quality scores let borrowers qualify for mortgage dollars, they also allow borrowers to obtain the lowest possible interest rates.
A credit score is determined by two main factors: Does a borrower pay his or her bills on time? And does a borrower use only a small portion of the credit available to him or her? The editors at Bankrate.com recommend that borrowers have less than 30 percent of their available credit in use to nab the best possible credit score.
The Higher the Income, the Less of a Risk You Are
Lenders also prefer borrowers who have held their jobs for several years and who have low debt-to-income ratios. Most lenders like to see a debt-to-income ratio of no more than 36 percent, according to Realty Times. This means that borrowers should be spending no more than 36 percent of their income on debt, including a future mortgage payment.
If You Don’t Qualify for a Mortgage Loan
As mortgage lenders become stricter, many borrowers may find that they cannot qualify for a mortgage loan. This is OK. Borrowers who don’t meet these stricter guidelines are most likely not financially ready to handle the burden of a monthly mortgage payment.
This doesn’t mean that such borrowers shouldn’t ever take on a monthly mortgage. These borrowers should work to rebuild their credit by paying their bills on time and paying off the balances on their credit cards. They should save money and work on boosting their income and lowering their debts.
This way, when they appear before a mortgage lender again, they will qualify for that home loan.