Buyers beware: lending rules have changed

If you’ve been considering the purchase of a new home, you need to get your ducks in a row like never before.  We no longer live in the era of easy money.  These days, you need to get yourself pre-approved before you start looking for your next home.

When pre-approved, you are in a much better position to get the right loan for you—with the terms that fit your life.  This is critically important in today’s economy, because the lending rules have changed. Here are a few examples:

1.  Debt-to-income ratios

A debt ratio that was acceptable two years ago wouldn’t even be considered today.  A lender will scrutinize your debt like never before.

They may have tolerated a certain level of indebtedness before, but the acceptable “debt to income” ratio has been significantly reduced.  You’re better off getting rid of as many outstanding debts as you can before beginning the pre-approval process.  A good lender can give you the specifics of what will work best in your situation.

2.  Job security

In today’s topsy-turvy economy, lenders want to know that you’ve been employed for a long time.  They’re also looking for reassurance that you will continue to be employed for a long time.

3.  Loan-to-value limits

Many lenders are reducing the total loan value they are willing to lend.  For example, there may be a 90% or 95% maximum loan level. 

This means that if you qualify for a house price of $300,000, they will only lend you $270,000 or $285,000.  The difference is money that you will need to provide in the form of a down payment.  So, make sure that you really know your numbers before you go out shopping.

4.  Creditworthiness

It’s not just your credit score that’s considered, but also the types of credit that you have.  You may have a high score, but if you have too much available credit, you may be considered a higher risk.  A lender may decline to lend to you, or you may be penalized in the form of a higher interest rate.

All these factors are part of the tougher picture we face since the current economy took hold.  Don’t let the new rules intimidate you, though.  Knowledge is power.  The more you know about what will be expected of you in the loan process, the more you will be prepared to provide what lenders need.