The housing bubble has burst. Sub-prime mortgages have been dissolved and the real estate market is finally gaining momentum. However, mortgage lenders and financial institutions are still lending to home buyers at their lowest numbers in nearly 30 years. The biggest financial hurdle that my client's face seems to be the satisfaction of their lender's credit requirements. As a Realtor, I talk to potential clients every day about the possibility of buying a home in the near future. Very frequently, I hear from these individuals that they are afraid they will not be approved based on their lack of credit or their low scores. As an investor, most of the properties that I pursue to rehabilitate will end up bing middle-class homes for middle-class people. The reason why is because houses are expensive- even distressed ones. We've got to get them at a discount, inject value and then sell them according to the area. I am very glad and proud to be able to provide that quality of home for that quality of folks.
In most instances, lenders will approve financing if the borrower (or co-applicants) have an average of a 580 credit score at the very minimum. The lender would like to see at least a 600 before feeling comfortable that the borrower will satisfy the credit requirements. Unfortunately, a lot of people are not quite able to achieve these requirements. I have written before about both the importance of financial literacy, as well as the lack of financial education available to many. A lot of the individuals that are turned down based on their credit are unaware of how low their credit scores are because they do not understand how credit is scored and reported. Credit can be an awfully problematic thing if not treated with respect. However, it is a necessary if you ever want to finance a home or vehicle (unless you pay CASH!). Many of these individuals with low credit easily satisfy the income and debt requirements that their lender imposes, but they are not approved because of old mistakes or late/missed payments that they might be completely unaware of.
The good news is that credit is relatively easy to fix. Once you examine your credit report, you can challenge many of the negatives that show up on that report. If you can prove that you have remediated any of those issues, you can write a letter to those reporting agencies to remove those negative items and improve your score. It takes some diligence and patience, but it is really worth the effort. For those who do not know, there are three major credit reporting agencies (Equifax, Experian and Trans Union) that all compose their reports differently based on your debts and debtor history. Different lenders prefer different reporting agencies and will often just the average score of the three to decide whether or not a borrower satisfies their credit requirements. Most lenders view credit scores like a resume, meaning that they use those reports to examine the credibility of the borrower and their intention of paying back their debts in full and on time. As frustrating as credit can be; it makes sense that these reports exist. Would you loan a couple of hundred thousand dollars to someone that won't pay their cable bill? These institutions are businesses above all else and need to insure that they are lending to quality borrowers.
More good news is that the NAR (National Association of Realtors) has been canvassing Congress to ease up on many of the strict regulations that borrowers face from lenders. If we want home ownership to continue to increase, we need to make home ownership more achievable. We do not ever want to return to the indiscriminate and dangerous practices of the mid- 2000s, but we need to make the restrictions manageable for buyers. Many of the lenders have made their criteria very difficult to achieve in order to avoid lending to dangerous borrowers like they had before the recession. According the article, NAR to Congress: Ease Up on Mortgage Credit, Chris Polychron, President of NAR, spoke to Congress and urged them to make mortgage credit requirements more favorable for borrowers. According to Polychron,
"In some cases, well-intentioned, but over-corrective policies are severely hampering the ability of millions of qualified buyers to purchase a home. I believe, and our members believe, that we have yet to strike the right balance between regulation and opportunity."
Today, there are less than 30% approved mortgages than there were before the recession. Much of the reason that this number is so low is because many lenders are still in reactionary mode from the crash. As most things, we would do well to find a happy medium and stay there. And if you are concerned about your credit score, I strongly suggest that you go to Credit Karma and check your score. Credit Karma is free, they do not berate you with emails and they provide a soft credit report, which does not affect your credit score (because too many credit inquiries can often ding your score for a short time). We have already come quite some way with credit reporting. There was no service like Credit Karma until a few years ago. Now you can freely check your credit for free whenever you would like. They suggest that you do this once per month.
If you have good credit and want to buy- GREAT! Contact me and I will be more than happy to help!
If you do not have great credit but want to buy a house- GREAT! Contact me and we can discuss the necessary steps to improve or build your credit before you buy!
Want to sell a house? GREAT! Contact me because credit doesn't matter in that case!
Troy Franklin Gandee