Getting a Normal Mortgage in a Not-Yet Normal Market

The U.S. housing market is recovering, but is a ways off yet from returning to “normal” levels. In fact, the market is now 64 percent back to normal, according to real estate data company Trulia. While that is certainly more than half way there, it means there are still some challenges when it comes to mortgages.

Home loan lenders are only recently starting to ease up on their credit standards. Since the housing bubble popped several years ago, lenders have been reeling from the aftermath of millions of foreclosures as well as tough new mortgage regulations. Trulia reported that the share of mortgages in delinquency or foreclosure in July fell 9.23 percent to an almost five-year low. Even still, the company estimates that the delinquency and foreclosure rate is only 56 percent back to normal at this point.

With foreclosure losses still fresh on the brain, mortgage lenders are still looking to minimize risk by lending to the most credit-worthy borrowers. So what can you do as a buyer if you don’t have the best credit? Here are a few options:

  • Wait. Take some time to improve your credit by making many months’ worth of payments on time, paying down major debts and refraining from applying for any new credit lines. You could start to see a real increase in your credit score in six to twelve months.
  • Increase your down payment. If you can offer more money upfront, the lender takes on less risk and is more likely to accept your application. A 20 percent down payment is the gold standard, but talk with lenders to find out how much they would expect you to provide.
  • Downsize. Think about buying a smaller, less expensive home this time around. When you are not stretching your budget to become a homeowner, it will be easier to find favor with banks. Plus as you make timely payments on the smaller home you will improve your credit and be ready to move up to a bigger home in a year or two.

Getting a normal mortgage in today’s non-normal market is still possible for those with less-than-perfect credit. It just requires a little more patience and planning.

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