by Maurie Backman | Sept. 15, 2020
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Lenders are getting stricter about giving out mortgages, and borrowers need to be aware of that.
There's a reason prospective buyers are clamoring for home loans right now: Mortgage rates have dropped to historic lows, which means it's a good time to lock in a great deal. But despite the opportunity for major savings, some potential buyers may have to hold off on their mortgage applications and work on making themselves more viable loan candidates instead.
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Mortgage lenders have tightened up their borrowing standards to the point where it hasn't been this difficult to get a home loan in six years. Specifically, the Mortgage Bankers Association's Mortgage Credit Availability Index fell 4.7% to 120.9 last month, the lowest since March 2014. That index measures the availability of mortgages based on credit risk, and it indicates that lenders are implementing stricter standards during the ongoing coronavirus pandemic and recession. The lower the index, the harder it is to get a home loan.
Generally speaking, you'll need a minimum credit score of 620 to qualify for a conventional mortgage, but some lenders may be seeking higher credit scores at present. Lenders may also be stricter with their down payment requirements. Previously, you could qualify for a mortgage with as little as 3% down (albeit getting hit with private mortgage insurance in the process), but now, 3% down may not fly with some lenders. As such, mortgage candidates may find that they're unable to get approved for a home loan today, whereas a year ago, things might have been much different.
The higher your credit score, the more likely you are to get approved when you apply for a mortgage. So if you've currently hovering in the low 600s range, work on bringing that number up. Here are some ways you can boost your credit:
Of course, the more you're able to boost your credit score, the greater your chances of locking in a competitive rate on your mortgage. A credit score of 650, for example, might get you a mortgage, but if you want a top rate, you'll generally need your score to reach the mid-700s.
In addition to boosting your credit score, it pays to save extra money toward a down payment, in case your lender requires it. If you put more money toward your home purchase, it will also help you avoid a scenario where you get underwater on your mortgage (which means your outstanding mortgage balance is higher than what your home would sell for).
Finally, be prepared to show proof of a steady job. If you don't have one, you may need to delay your mortgage application. These days, lenders are being extra thorough when checking up on employment. You may need to submit several months' worth of paystubs, and you should expect your mortgage lender to call the company you work for to verify your employment status.
The fact that mortgages are becoming harder to get could help prevent some borrowers from getting in over their heads. On the other hand, tighter borrowing requirements could make the mortgage application process more frustrating. If you're hoping to buy a home in the near future, work on making yourself the best candidate possible. Not only are you more likely to be approved but you could also snag a more competitive mortgage rate to boot.
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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