With the mortgage market firmly in the news right now, it is not surprising that one of the questions that I have been getting the most from readers is the following:
“Will I be able to get a home loan?”
Well, the answers to such personal finance questions are rarely straightforward. And neither is the answer to this one. As always, the answer for you depends on your individual situation right now. But we will look at two basic scenarios that are likely to broadly cover most people (of course, specifics always come down to your own special situation).
Answer #1: Yes, you will be able to get a home loan
This answer applies to those of you who have reasonably good credit, and who have kept a debt-to-income that is acceptable. Why? Because you are going to have to go for a traditional loan. It is substantially harder to get what is known as “creative financing” right now. With companies struggling right now because of the subprime lending crash, it is not surprising that lenders, wary of credit risk, defaults and foreclosures, are tightening standards and expecting traditional loans to represent a little more.
Answer #2: No, a home loan is not in the cards for you
If you are a little iffy on the credit, or if your debt-to-income ratio is too high, you will probably not be able to get a home loan. Subprime lenders are requiring much tighter standards, and credit score below 650 (and in some cases even that won’t get you a home loan) may not be enough (like it was two years ago). The shakeout also means that “creative financing” is harder to come by, and that even so-called no-doc and low-doc mortgage loans will require more documentation. Chances are, if you are struggling right now, you probably will not be able to get a home loan.
There are always exceptions, and different rules will come into play. But right now, everyone is a little risk averse, and this goes especially for lenders. If you are in the market for a traditional home loan, you won’t see a great deal of change in the process. You just might have to do a little more. But if you need a subprime loan, you could be in trouble.