Would-be homebuyers who are worried they won’t qualify for a home loannow might have fewer reasons to stress out. While the housing market crash a few years ago led to stricter screening of potential homebuyers, it now appears mortgage lenders are starting to lighten up on the criteria for borrowers.
Some of these changes could be especially good news for people with student loan debt. Oftentimes, student loan borrowers are shut out from getting mortgages – a problem that has inspired entire mortgage loan products and even legislation.
How Guidelines Are Easing Up
When it comes to doling out mortgage loans, lenders are now more willing to forgo large down payments for the right borrowers. They’ve lightened up on the debt-to-income ratios they’ve typically liked to see, and they’re becoming more relaxed about the rules regarding how student loan payments are factored in.
These changes can put homeownership more within the reach of first-time buyers, younger people who are working their way up to bigger paychecks, and people who are beginning to build themselves back up after financial trouble.
“We are seeing thoughtful underwriting of loans and a greater understanding that younger first-time buyers are in a growth phase of their careers,” John Pataky, EverBank executive vice president of the consumer division, told the Gazette in Cedar Rapids, Iowa.
How This Helps
One of the hardest parts about buying a home can be the hefty down payment that was traditionally required. Many homeowners still believe they may have to cough up a large down payment, potentially up to 20 percent of the home’s value. But would-be homeowners can buy houses for anywhere from zero to 3.5 percent down.
Furthermore, some renters think they need a credit score of more than 700 to qualify for a home loan. But lenders are willing to lower that amount to 620 for some loan programs.
And for student loans, lenders now use the actual minimum monthly payment amount to calculate debt-to-income rather than 1 percent of the full balance. The previous calculation often over-estimated a borrower’s payment, which could lead to them getting declined for a mortgage.
By loosening some of the prior standards, it opens up the possibility of homeownership to candidates who might not have qualified in the past. The trick may be getting that message out to prospective homebuyers.
Credit Tips for Homebuyers
Would-be homeowners should take a look at their debt-to-income ratio and keep it as low as possible in order to qualify for a loan. Some lenders used to require a debt-to-income ratio of 45 percent, but last year it was bumped up to 50 percent.
But in order to make that ratio as low as possible, lending experts advise borrowers to avoid purchasing cars, using loans, or racking up credit card debt before applying for a home loan. A mortgage professional might also suggest ways to reduce your other monthly payments before you apply for a mortgage. This might include using part of your down payment money to pay off some of your other debts instead.
For student loans, you might consider student loan refinancing. Student loan refinancing, or consolidation, is offered by private banks and lenders to student borrowers. In brief, you apply for a new loan which is used to pay off the previous loans. After a successful refinance, you are left with one loan, a new interest rate, and a new repayment term. The whole point is to get a lower interest rate on your student debt which could save you money and help with repayment; however, only the most qualified applicants can get the best rates on a consolidation loan.
Another helpful thing that borrowers can do is track their spending for a couple months before they purchase a home. Those who find they would be strapped for cash with a home loan might want to find a way to increase income or look for a less expensive home.
Author: Mike Brown
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