How a Recession Can Affect Your Home Mortgage Application

Preparing a proper home mortgage application is important during a recession when mortgages are harder to secure. Your credit score along will not be enough to secure a good mortgage as an effect of the bad economy. Rather, you must understand how the economy is affecting the market for mortgage loans and prepare your application appropriately. Your loan terms will be as much a factor of the greater credit market as your personal financial history. 

Provide a Large Down Payment

You should offer a large down payment to your lender as a way of reducing the total amount you will have to finance. Jumbo loans, those loans which go beyond the national standard set each year, are not typically accessible in a recession. Instead, you will need to seek a small loan and keep your debt to asset ratio very low. 

Providing a large down payment can be hard in a recession when your home price drops. Most people use the equity they had in their previous home as a down payment for the next. The real estate market generally suffers greatly in a recession, and your home price will likely drop. Start saving for a cash down payment in addition to the equity you will convert to assure your down payment is large enough to secure the loan and keep interest rates low.

Secure the Loan

Recessions generally make lenders very risk-averse. This means lenders will not consider your loan unless you can offer them some safety against default. While your income and credit score will go a long way to do this, you may also have to offer collateral on your application for the loan. In most cases, this means you will leave the deed to the home with your new lender until the loan is paid off. 

Since real estate markets are unpredictable and slow in a recession, the deed to your home may not be worth as much to your lender as it would be in a booming economy. It may be necessary to post cars or businesses as collateral as well. Remember to protect yourself by assuring you can make payments even if you lose your job. Set aside reserves so you do not lose these assets in a fiscal emergency. 

Prepare a Diligent Application 

There are less loans available during a recession. Banks and lenders cannot borrow from each other very easily, and this means they cannot loan to consumers easily either. Recognizing you are competing for a few coveted loans is important. This means your application will carry even greater weight than it would in a loose money economy.

Your application will be judged on every aspect, not just on the information you provide. Be sure to thoroughly complete each section and not leave any missing information. It is important to present your application professionally without any errors. As you are being compared to other applicants, any action that can make you stand out as a quality borrower will help your chances of getting a mortgage in a recession.