You’ll Have to Approach Credit Cautiously if You Want a Mortgage

As the effects of the recession continue to fade for millions of people across the country, a larger number may want to pursue a home loan once again for the first time in years, or perhaps ever. The good news for these Americans is that home affordability is once again on the rise thanks to a temporary drop in mortgage rates that served to cancel out increasing prices. However, there is bad news as well: It’s still very difficult to get a mortgage.

Even as the economy has improved, and banks have made many types of credit far more available to consumers across the country, mortgage availability remains extremely low. In fact, some experts say that banks are being so cautious about this type of financing that it’s actually holding back a more robust housing — and therefore broader economic — recovery. The reason why should be fairly clear: Mortgages are massive investments for banks and they are therefore, in their minds, trying to do all they can to avoid the pitfalls and financial losses that came with the previous market meltdown. That it might be coming at the expense of many consumers who now believe they should be able to qualify for such a home loan given their personal standing is unfortunate, but remains the reality at this point in time.

Because of that extreme credit tightness, you will need to do all you can to make sure you’re as attractive an applicant as possible in a number of ways, and that should start with your credit score.

What does it take to qualify?

If you’ve been out of the housing market for a while, you might not know just what it takes to qualify for a home loan these days. The average mortgage applicant who’s actually approved for financing usually has a score in the mid-700s, and that’s up considerably from what was usually required just six or seven years ago, before the housing downturn really began to take hold. This is because a credit score is, at its core, mainly used as a way to determine how likely someone is to be able to pay all their bills on time and in full every month. Because lenders are now so risk-averse, these higher scores will in turn help to ensure that they’re only dealing with borrowers who seem to be the most certain to not miss payments.

In addition, those who are being approved these days are also coming in with potentially a very large down payment. In fact, many are now requiring that even those with the highest of top-notch credit scores also provide down payments of at least 20 percent as a means of having their applications approved. This, too, further serves to reduce the bank’s risk because if they only have to grant the borrower 80 percent of a $300,000 home loan, as opposed to 90 or even 95 percent, the amount of skin they have in the game, so to speak, drops by tens of thousands of dollars.

What will you need to do?

Obviously, the need for a high credit score and potentially massive down payment means that you’re going to need to tighten up your finances considerably, in a number of ways. For one thing, you might need to really step up your efforts to put money into savings, specifically for this purpose, but finding that extra wiggle room in your monthly budget isn’t always easy. Fortunately, one method for doing so can also help your credit score considerably.

Before you start saving, you might want to start paying more every month into your various debts. This will serve to bring your balances down — potentially by a significant amount — which can help your credit score immensely, but also means that your required minimums will likewise start to decline. If your minimums drop by a combined $100 per month after a little while of seriously trying to bring down your debts, that’s $100 you can then devote to savings. And the good news is, the more you work to cut those balances, the better your score will be and the more you’ll have to contribute to your savings as time goes on.

Of course, not all credit repair efforts can be achieved completely by handling your accounts wisely. You might also need to order copies of your credit reports and check them over closely to ensure that no unfair markings are having an undue negative impact on your standings. If so, working with a credit repair company may be a wise course of action, as doing so might allow you to get your scores and other aspects of your finances in order more quickly than you might have been able to achieve on your own.

Posted in Mortgages
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