It appears that lenders are beginning to loosen their grip on lending money, but your personal credit history will still be a determining factor in whether you qualify for a car loan, mortgage or line of credit.
Banks tightened their hold on lending when the financial crisis hit and individuals and business owners who were
Because of the recent credit crunch, your credit history and credit score are more important than they ever were. For borrowers with top credit scores – above 720 – rates are a rock bottom levels. You should know your credit score before you go loan shopping, though. Check your credit report for errors and any unexpected surprises.
Even though mortgage lenders are ready to make loans and may even bid against one another for your business, the lending standards remain rigid and you will have to produce stacks of paperwork to document your assets, income and expenses.
Rates have dipped down to 1950 era, so going through the motions could pay off. In mid-September, the average interest rate for a 30-year, fixed-rate conforming loan — a mortgage of $417,000 or less — was 4.5%, according to HSH Associates, a mortgage-tracking firm. The initial rate for a 5 year adjustable-rate mortgage (a fixed rate for five years, followed by annual adjustments) was 3.6%.
Fannie Mae, Freddie Mac and the Federal Housing Administration continue to dominate the mortgage market, setting the standards for the loans that lenders make and sell to investors.
For a conforming mortgage loan you will likely need to come up with a minimum down payment of 5% to 10% or 10% to 15% for a conforming jumbo loan (125% of a metro area’s median home price, up to $729,750). With 20% or more down, you avoid private mortgage insurance, which typically costs 0.5% to 1.5% of your loan amount per year.
Fannie Mae and Freddie Mac allow a minimum credit score of 620 if you have at least 25% equity in the property or a score of 660 with equity of less than 25%; you’ll get the best rate if your score exceeds 720. The FHA will soon require a minimum credit score of 580 to qualify with a down payment of 3.5%, but FHA lenders often impose a higher minimum score of 670.
Lenders will scrutinize your ability to pay, starting with your ratio of debt to income. Monthly housing expenses (principal, interest, taxes, hazard insurance, private mortgage insurance and association fees) shouldn’t account for more than 28% of gross monthly income. To qualify, total debt shouldn’t exceed 36% of gross income, but in some cases lenders stretch the maximum to 45%.
You will have to supply pay stubs for the past 30 days and W-2 forms for the past two years as proof of stable income. Lenders will also want to see bank, retirement-account and investment statements for the past 60 days.
For self employed individuals, or if 25% or more of your income is from commissions or bonuses, you must provide two years of tax returns. Lenders will average your income over the past two years to figure your debt-to-income ratio. If you have pursued opportunities to reduce your taxable income, you may not have sufficient income to qualify even though you may have a lot of money in the bank.
Even if you qualify, you can throw the deal out the door in the final loan approval phase if you take on new debt that could affect your credit score or your debt-to-income ratio. Some lenders pull another credit report just before closing. Another possible sticking point could be the appraisal as inflated appraisals helped to inflate the housing bubble. Now appraisals that are lower than expected may slow down or completely thwart your closing.
Several years ago obtaining a home equity loan was an easy process but now the lending restrictions have tightened on these as well. In most cities you won’t be able to borrow more than 80% of the appraised value of the home, less the mortgage. You will also need a credit of at least 720, as opposed to the 650 to 680 you could get away with a few years ago. As with first mortgages, you’ll have to document income and assets. Interest rates depend on the amount you borrow and your location. Recent rates averaged about 5.3% on home-equity lines of credit and 7.4% on loans, according to HSH.
When it comes to car loans, your credit may not hold you back the way it did in the past. According to CNW Research, approvals are up from last year in every credit category, according to CNW Research. Lenders are looking for 10% down on a new car and 20% for used cars.
Despite fewer credit-card delinquencies, most large issuers have not relaxed their standards; they continue to require higher credit scores and offer lower credit limits than before the recession. You will have a difficult time qualifying for a credit card if you have a fair or poor credit score. Even if you have a credit score of 740 or 750, you would be approved for a credit card but might not qualify for the lowest rate.
Once you get approved for a loan, mortgage or credit card, you need to pay on time to continue to qualify for the best rates. Even if you are just paying the minimum amounts – which lenders don’t recommend, they recommend you pay more. Be advised, though that if lenders receive a payment, even a day past the due date, your card issuer can charge late fees or even raise your interest rates.
Try to keep your credit card balances below 30% of the total credit card limit because if your charges rise above that ratio, it’s a red flag to your credit score and could prompt the card issuer to raise your rate (they are required to give you 45 days notice).
While it always has been and always will be important to manage your credit and income wisely, in light of the recent economic conditions you need to be extra diligent.