When my husband and I relocated to Indiana last summer, we went through the grueling process of selling our house in Ohio and buying a new one in our new town. In addition to the stress of packing, moving and preparing our beloved old house for sale, we were incredibly surprised by the number of hoops our mortgage lender made us jump through in order to purchase our new house—which was a great deal less expensive than our former abode. Considering the fact that my husband purchased our Ohio house in 2005, when banks were basically giving money away, some of the stricter standards we saw in 2010 seemed reasonable. (The pint of blood needed at closing did not). But what exactly can you expect if you are applying for a mortgage in the post-housing crisis market? Here are a few of the more stringent standards:
1. Borrowers must have better credit. In 2009, it was decided that the minimum credit score for taking on a mortgage should be 620, rather than the 580 required prior to the sub-prime market implosion. If your credit score is below that threshold, you will want to work on improving it before you look into home ownership.
2. Borrowers must have a lower debt-to-income ratio. It used to be that you could qualify for a mortgage with debt payments equal to 55% of your income. Now, the maximum percentage is 45%. So even if you find a home that will be able to grow into, you may not be able to get the financing for it.
3. Borrowers can’t have any missed credit card payments. Before the housing crash, a missed payment or two on your auto loan, credit card or student loan didn’t make a difference if you were an otherwise qualified candidate. Now, banks will factor in 5% of the outstanding balance into your debt-to-income ratio, possibly disqualifying home loan. If you are looking into home ownership in the near future, make sure that you stay on top of your loan payments.
4. Borrowers have to wait longer after cleaning up from a foreclosure. Anyone can make a mistake, and it used to be that showing five years of good financial decisions after losing a home to foreclosure was enough for you to qualify for a new mortgage. These days, you will have to show seven years of financial well being before you are allowed to borrow. The only benefit to the required two years is that it could theoretically give a home buyer more time to save for the down payment.
Amazingly, one quarter of all potential home buyers are rejected for mortgages. While it is important that we do not have a repeat of our housing crisis, it is unfortunate that the banking industry seems to be throwing the baby out with the bathwater.