Loosening credit standards may be coming to the rescue for home buyers everywhere. Most economists agree that the one overriding factor why home sales haven’t rebounded in many parts of the country is because lenders are still making it too difficult for many homeowners to secure home loans.
Although the average credit score needed to secure a home loan currently hovers around 700, which is where it has been for some time, more banks are loosening up their standards in other areas, such as how much money they will lend borrowers. Banks, in fact, are lending amounts of up to three and a half times the salary to borrowers (for example, if you make $50,000, you can expect to be approved for a loan of up to $175,000, although this amount may vary depending on a number of other factors, as well).
Banks are also loosening their standards when it comes to loan-to-value ratios, which is one of the largest factors when it comes to improving mortgage credit conditions. Just a couple years ago, loan-to-value ratios stood at about 74 percent, while today the average loan-to-value ratio is closer to 82 percent.
It still pays to note, however, that some home buyers are still struggling to meet the standards of today’s lenders. In November, for example, Capital Economics noted that 8 percent of contract cancellations were due to buyers not qualifying for a home loan.
Although credit standards are looser than they were a year or two ago, it is important to note that the credit industry, in general, is still much more selective when it comes to approving home loans than before the recession. Because of this, it is important to understand what you need to do to secure a home loan in today’s market:
- Pay your bills on time – Your credit score is made up of several factors, but the largest one is simply your ability to pay your bills on time. Some borrowers are shocked to discover that they possess a low credit score because, although they made every attempt to pay their car notes and credit cards on time, they neglected other bills, such as student loans and utility payments. Remember that all bills are important in the eyes of creditors, and neglecting to pay even your water bill can cause your credit score to plummet.
- Keep your debts down – Even if you pay your bills on time, each and every month, you could still end up with a less-than-desirable credit score because of the amount of debt you carry. Commonly referred to as your debt-to-income ratio, it is a number calculated by a lender and by the credit reporting agencies when determining your credit score. The more debt you have in relation to your income, the lower your credit score may be. Because of this, it is important to pay off such debts as car notes and credit cards, as these are often considered “bad” debts, in relation to student loans, which are often considered “good” debts. The more debt you burden yourself with, the more cautious banks will be when it comes to lending you more money and adding to your debt load.