The Flawed Homebuyer

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Putting off home buying because you think you won’t be approved for a mortgage?

Well, the market is getting back to “normal”, meaning that the strict standards lenders adopted in the wake of the foreclosure crisis to reject risky applicants are waning.

Researchers at the non-profit Urban Institute recently completed an extensive study on mortgage application rejections.

Among the findings indicating that lending standards are settling back into long-term norms: In 2013, 41 percent of applicants with poor credit profiles were denied, but in 2017 the rate dropped to 32 percent.

Still, a lot fewer borrowers with poor credit profiles are applying for mortgages than did in the previous “normal” period, probably because they think it’s futile to apply.

Here, one of the Urban Institute researchers, Bing Bai shares his findings on lending standards now.

“Low credit profile” or LCP borrowers with a FICO score below 580, and whose regularly occurring monthly debt [with the new mortgage payment] would be half or more of monthly income, and who have less than a five percent down payment will likely be rejected. But improve on one or more of those measures, like put ten percent down or have a credit score of 620, and you might be approved.

“Ask to be pre-qualified,” suggests Bai. Typically offered for free, pre-qualification is not a firm commitment to give you a mortgage, but it’s a good way to size up your chances.

If you’re seeking a small mortgage, less than $70,000, your odds are being rejected are greater. That’s because lending firms don’t want to spend time evaluating these loans, which are too small to be profitable. One way to boost your chances is to apply with a local bank, since regulations require a certain amount of lending to fund purchases of low-cost homes.

Look for VA and FHA mortgages. During normal and “tight” market conditions, these government-backed loans are more forgiving.

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