It isn’t uncommon to hear people saying owning a home is the American Dream. This saying is part of American culture because, for many Americans, owning a home is the first step towards achieving several economic benefits.
Some of such benefits include accumulating wealth and access to credit by building home equity, reducing housing costs through mortgage interest deduction, and long-term savings over the cost of renting.
However, buying a home is a costly endeavor involving hundreds of thousands of dollars. This is the basis for mortgage financing in the US.
Getting a mortgage loan could be particularly challenging for a significant percentage of the population, especially minorities. Many first-time homebuyers have difficulty saving for a down payment, paying off student loan debt, or passing the credit threshold.
Those who save enough for a down payment are often assessed higher lending fees that make the mortgages affordable. Approximately 8% of the African American and Latino homeowners lost their homes to foreclosure between 2007 and 2009.
This was almost twice the rate of white homeowners. So, how can we reinvent the American Dream for everyone, especially minorities? This article answers this question and more.
Mortgage Financing Standards Before 2008
In the early 2000s, before the financial crisis, the homeowners’ dream was easily attainable. This era witnessed the democratization of access to financial products. So, almost anyone could get financing for their home. Subprime lending was on the increase too — banks gave loans to people who’d find it challenging to repay. People with weak credit histories easily got mortgages. Many people who received financing had records of:
- Loan defaults
- Missed repayments
- Excessive debt
- Debt defaults (inability to complete repayments)
- Zero or limited debt experience
- Little or no property assets that could serve as collateral
One argument was that subprime lending provided credit to those who’d ordinarily not get the same. However, this practice ended badly, as we all know; the inability of the borrowers to repay their loans weakened the financial markets.
Mortgage Financing Standards After the Financial Crisis
The financial crisis of 2008 increased regulatory oversight of the finance industry. These regulations also made mortgage borrowing more cumbersome. Below are the new hoops finance seekers have to jump:
High Credit Scores
Typically, all lenders require to see your credit scores. A credit score is a numerical description of how well you manage your personal finances. Several factors influence this score, such as your:
- Payment history
- Total levels of debt
- Length of credit history
- Credit mix and
- New credit
Credit scores range from 300 to 850. So, the higher the score, the greater your chances of getting a mortgage. Notably, though, most mortgage products demand scores above 620.
Whether or not you have a job is also crucial. Lenders require proof of consistent income from loan applicants. Furthermore, the focus is usually on the last two years of employment. So, a steady paycheck significantly helps your mortgage financing application.
Self-employed individuals may have it harder, though. A bank will consider both your business and personal financial stability. Before granting a loan, the lender will want to confirm that your business can repay. It can reach this conclusion by evaluating the possibility of continuous future revenue generation.
Your debt-to-income (DTI) ratio is the result of dividing your total debt by your gross monthly income. The acceptable ratio depends on the loan type and lending facility. For example, conventional lenders can accept a DTI of 45% or less. However, some other financial institutions may increase this to 50%. This high percentage can also come with greater requirements across the board.
Finally, some lenders usually check the applicant’s income. It’s insufficient that you already have a job or business. Instead, the bank may require specific income limits from borrowers. In addition, there’s often a demand for residual earnings. The idea is that this becomes necessary when your primary income fails.
Improved Creditworthiness Is Your Key to Achieving the American Dream
Getting mortgage financing currently depends on your creditworthiness. Banks want to know whether you can repay your loans. However, creditworthiness isn’t something that starts counting when you apply for a loan. Instead, lenders check your entire credit history and score.
So, you must start implementing steps to increase your creditworthiness. Some of such measures include:
- Frequently evaluate your credit file to check for weak spots.
- Ensure there are no mistakes on your credit file.
- Pay your credit card and loans early.
- Use different credit types.
- Don’t frequently change jobs or houses. Lenders look out for stability in borrowers
- Apply to be added as an authorized user to any old account with a perfect credit score.
- Employ credit monitoring services for your credit score.
Are you planning to buy your first home? Then, it’s essential to treat creditworthiness as if you’re currently applying for a loan. So, when you actually apply for a loan, you’ll have greater chances of success.
Getting mortgage financing is indeed more challenging today. However, you can still get the money you need for a new house and live your dreams. The process of improving your creditworthiness shouldn’t worry you; instead, it should be a guide to achieving the American Dream.
Need some help? You can contact us today to make your excellent credit score a reality and get help with meeting the qualifying guidelines for mortgage programs.