You Can Qualify for a Mortgage I – The Challenges

By Keith Rockmael

In this sizzling real estate market, it remains tough for would-be home buyers to compete with investors and all-cash buyers. Add to the fact that as of January 2014, the Dodd Frank banking rules came into effect which made lending rules even stricter. Tougher lending standards and stricter DTI (debt to income) ratios now mean that people either need to have more income or less debt. Some loan officers will pre-qualify home buyers at a lower amount but that doesn’t help with rising prices. Today’s home buyers face various challenges, so what are the keys to opening the bank vault?

Three years ago, Congress enacted the Dodd-Frank Act to remedy lending excesses that took place before the financial meltdown. Although Congress meant well, many financial experts think that the new laws have had a detrimental impact on lending. Many lower-income borrowers with high DTI ratios may have few options.

Credit scores became a hot topic during the meltdown and today they remain a key point when qualifying for a loan (or a refi). A report from Moody’s Analytics and the Urban Land Institute showed the average FICO score on purchase loans now hovers at 750, up 50 points from pre-crisis markets. Those with lower scores may need to increase their credit scores or risk not qualifying for a loan.

Many homeowners’ credit scores plummeted during the meltdown. Anyone who suffered a foreclosure, went through a bankruptcy or did a short sale during the downturn will find it challenging to get back into the home-buying game. Any of the above mentioned actions can negatively impact a credit score. To make matters worse, most (but not all) lenders will not lend to anyone within two years of a short sale. Those that do find lenders who will lend after the “last bad act” will likely pay up to five points and receive a higher interest rate.