Since the housing bubble burst, banks have been looking differently at mortgage qualifications.
Contrary to popular belief, not all debt is bad. But how do you determine what is good debt and what is negatively affecting your credit?
Ever since the early days of credit scores, one of the main incentives for building a favorable credit history has been the positive effect that a strong credit score has on your ability to secure different types of loans, including home mortgages. With a good credit score, you may also have an easier time renting an apartment, signing up for a cell phone plan, and securing a new credit card with a favorable interest rate.
Today, strong credit doesn't guarantee you'll get a mortgage.
When you apply for a mortgage, your credit score and credit history are two of the "tools" the lender uses to assess your qualifications. These are the strongest indicators of your ability and willingness to pay bills and settle debts. But despite the universal acceptance of credit scores as a predictor of good financial behavior, even a great credit score won't get you a mortgage in today's market. How did this happen? Read on...
"Good credit is still important," says Mike Dolan, branch manager of Luxury Mortgage Corp. in Westport, CT. "It affects the rate and the products you can qualify for."
What Dolan is quick to point out, however, is that today the mortgage industry has to pay attention to the higher risk factors that exist in the housing industry and in other sectors of the economy. Prior to the economic recession of 2008, people had more job security and it was a fairly sure thing that housing would continue to rise in value. Those certainties disappeared with the recession of 2008.
"Credit, income and assets. Those are the three columns of qualifying for a mortgage, " Dolan continues. "Pre-2008 you needed two of the three. In 2007 there were times when you only needed one of the three. You could have a 750 credit score and income to qualify but no down payment funds and still get a mortgage with 100% financing. Or if your credit score wasn't as strong -say 600 or so-you could put 20% equity into the house as a down payment and still get a conventional loan."
Today Dolan says that you need to score well in all three areas (credit, income and assets) to get a smooth ride through the mortgage application process. Proof of employment is important, and people who are self-employed can expect to have a harder time. While a mortgage applicant who works for a company can simply supply pay stubs as proof of employment, a self-employed individual typically needs to show two or three years of income tax returns.
Mortgage lenders today are sticklers for documentation, according to Dolan. "If your bank statement shows a $1000 deposit that isn't from payroll, you must prove where it came from," he says.
Other banking professionals agree with Dolan about the difficulty of getting a mortgage, even if you have a stellar credit score. In Kiplinger's financial newsletter, Patricia McClung, of Freddie Mac, stressed the importance of the "three C's of credit:" credit history, capacity (salary, employment history) and collateral (your down payment and the value of your property). McClung advises: "If you're down on one of those, you don't want to be down on the other two."
In the same Kiplinger article, San Diego mortgage broker Victoria Johnson had her own shorthand assessment of today's market for home mortgages. To get a mortgage these days, she says, "you'd better walk on water." That may be a little extreme, but the message is clear: A good credit score is still a major factor in securing a mortgage. But as long as economic uncertainties persist in areas relating to job security and housing, it's going to take more than a super credit score to get a mortgage.