What Do You Mean I’m Not Qualified?

You have all heard the news about the mortgage crisis in America. For investors, the mortgage crisis is about defaulted loans, but for the average American, the crisis means being unable to qualify for a new mortgage or being unable to pay for the mortgage she already has. It looks like even the rich and famous aren’t immune from foreclosure, which means that getting a loan will be even tougher for folks like you and me. 

It seems pretty bleak out there and yes, I will admit that even in my area where home purchases haven’t slowed down, the mortgage process is much slower. There was always red tape, but now it’s criss-crossed with yellow caution tape and even the bank version of “do not cross-potential crime scene” tape.  If you are a qualified buyer you can still get mortgage money to make that purchase or to refinance that mortgage to do additions / improvements to your home, but expect to need more proof of good intention and good past credit behavior.

So what does the word ‘qualified’ mean in today’s market?  It simply means that you are a good risk for the lender. A good risk is someone with a good FICO credit score (something that I have been stressing to you all along). Banks rely on that FICO score to tell them about a person’s money habits. If your score is too low, you won’t get a mortgage. How low is too low? In today’s market, that’s subject to change. The minimum score used to be 525 for the sub-prime products. Now the minimum is 580 and will probably go up even further.  Why does the FICO score matter so much to the banks? Because it’s been proven that people with higher FICO credit scores tend to be more responsible with their spending and credit habits and are more likely to pay off their loans.

What about your home, does it qualify?  People with great credit have been denied mortgages because their homes are deemed a bad risk. This doesn’t have to mean the home is in bad shape, it simply means the mortgage amount is either higher than the current market value or too close to the current market value. This calculation is called loan to value. The higher the loan to value percentage the riskier it is for the lender. To my knowledge, there are no more 100% mortgage programs out there, and there are definitely no more 125% plans. This means that you must have a down payment if you’re a first time buyer and you must have equity if you’re refinancing.  So what if you are starting out and don’t have down payment money?  Then you need to get it.  I know that is obvious, but it’s become essential.  You need to either save, get a gift, or use down payment assistance to come up with some money for the down payment and closing costs. 

There’s more. Before the bank will qualify you, they will be check lifestyle habits that the FICO score doesn’t track. The list below may seem nosy to some hopefuls, but remember that you’re asking the bank to trust you with a lot of money. If you hope to get a mortgage, work on these and expect to show proof to the lender:

• Are you steadily employed and in the same industry? 
• Are there gaps in your employment history? 
• How are you handling your assets? 
• Does your checking account have a positive balance or are you bouncing checks?
• Do you have money in the bank for emergencies?
• If something were to happen to you, what do you have to fall back on? 

Take care of your financial life and you will be able to truly afford that new mortgage, which is much better than simply getting a loan. Here's to being qualified for a secure future.