by Maurie Backman | Feb. 23, 2021
Good news for borrowers -- lenders may be easing requirements to qualify for a home loan.
Mortgage rates hit record lows in 2020, so many people were tempted to go out and buy homes. But qualifying for a mortgage hasn't exactly been easy during the pandemic.
Many mortgage lenders have gotten stricter about loaning out money in light of the greater economic crisis. But new data shows that might be changing.
The Mortgage Bankers Association's Mortgage Credit Availability Index rose 2% in January to 124.6. While that still represents levels last seen in 2014, it also means lenders are loosening their requirements ever so slightly (the higher the value of the index, the easier it is to get a mortgage). And that's good news for mortgage applicants.
If you're hoping to buy a home soon, you probably can't afford to purchase it outright. Rather, you'll need to finance it with a mortgage. But for that to happen, a lender needs to say yes to your request, and that's more likely to happen if you do these things first.
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Your credit score speaks to how trustworthy a borrower you are. The higher your score, the more confidence a lender is apt to have about you being able to keep up with your mortgage payments. Usually, you'll need a minimum credit score of 620 to qualify for a mortgage, but in today's lending environment, you may need to do a lot better. And to snag a really competitive interest rate on your mortgage, you'll need your score to reach the mid-700s or above.
You can boost your credit score by paying all incoming bills on time, keeping long-standing credit cards open, shedding some unhealthy credit card debt, and checking your credit reports for errors (and correcting those you find). You can also help your credit by holding off on applying for new loans other than your mortgage, though that won't have the same impact as being timely with bills and lowering the amount of credit card debt you have.
Your debt-to-income ratio is another important factor mortgage lenders use to determine if you'll qualify to borrow, and it measures your monthly debt payments relative to your income. The lower that ratio, the better. So if you're carrying debt, aim to pay it off before applying for a home loan. Start by knocking out credit card debt because doing so could also help your credit score improve -- not to mention save you money on costly interest.
Mortgage lenders will want to see that you have assets available for a down payment and money in the bank to keep up with the cost of owning a home. You don't necessarily need to save enough to put 20% down on your home, but if you're able to do that, you'll not only increase your chances of getting a mortgage, but also avoid private mortgage insurance -- a costly premium that can make your home a lot more expensive to own.
The fact that mortgages are getting easier to qualify for means more borrowers may be in luck as 2021 creeps forward. Do your part to make yourself the best possible home loan candidate if you're planning to apply for a mortgage. That way, you'll get to benefit from today's exceptionally low rates.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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