How Credit Standards Have Changed in ourSlow Economy

Credit standards have always been fairly strict, when you are talking about financing a home. Lenders want to make sure that you can handle the money that they are giving you. Our lending standards becoming very lax for a few years as a result of many factors. However, once the economy slowed down and the mortgage market crashed, credit standards for mortgage lenders have been significantly tightened. If you are looking to get a mortgage during the slow economy, here is what you can expect. 

Higher Credit Scores

One of the first things that a lender looks at is your credit score. Your credit score is a compilation of your entire credit history. Therefore, the actions that you have done in the past will play a big role in whether or not you can get a mortgage today. Your credit score is affected by your payment history, the number of accounts, the balances on those accounts and a number of additional factors.

As a result of the slow economy, credit scores are required to be significantly higher than they once were. The scores that were once considered medium are now considered low as far as getting approved for a mortgage loan. Therefore, there is much added importance on your credit score than there once was and much more difficult to secure financing.

Debt-to-Income Ratio

In addition to your credit score, lenders have several ratios that they use in order to determine whether or not you qualify for a mortgage. One of the most important numbers that they look at is your debt-to-income ratio. This number compares the total amount of money that you owe to your creditors to the amount of money that you bring in each month. In order to qualify for the loan, you must meet your individual lenders debt-to-income ratio standards.

As a result of our slow economy, there is less flexibility with these ratios and lenders are approving lower loan amounts.

Ability to Pay

A lender will also want to verify that you have some way to repay the loan. For most people, this means that they will want to verify that you have a job. They will want to see your recent pay stubs, bank statements and information about your job. Then, they will call your employer and verify that you have a job with them and verify your earnings in writing.

In the past, the verification process was easier and a phone call or a “stated” amount would suffice. Because of the mortgage collapse, lenders have become very strict regarding the documentation required for verification of employment.

Also, lenders have become more cautious when evaluating loans for first time homebuyers. They are taking a close look at home much a buyer currently pays in rent and how they use their money.