By Nathan Walldorf, ABR, GREEN, GRI, SFR, e-Pro
President, Greater Chattanooga Association of REALTORS®
REALTOR® Magazine recently included a special supplement that outlined reasons obtaining a loan may be easier in 2016 compared to recent years. This news is welcomed by buyers who are anxious to enter the market but uneasy about navigating the lending waters. Their hesitation is reasonable considering numerous stories such as this one – during the middle of the recession an accountant told me his client’s lender wanted proof that his forty year old daughter no longer was a dependent. While lenders still are being conservative in how they lend money, thankfully some former extreme standards now have loosened.
For starters with the way credit scores now are calculated, it’s easier for a buyer to meet higher credit standards. For example, medical debt might be less of a concern than you realize. Due to confusion over insurance company coverage, medical debt counts less against a buyer than it used to.
As a result of the changes in how credit scores are determined, the average credit score for two government backed loans – Fannie Mae and Freddie Mac – is 754. Reeling back the clock to 2001, the average credit score was 711 – that’s a six percent difference.
Another factor is the lender must consider their risk. If you use a government backed loan, the lender has to be sure the loan is a good risk for them. Otherwise, the lender may end up buying the loan back from the federal government if the loan is foreclosed on.
With average credit scores being generally higher, lenders can offset their risk of buying back a foreclosed loan by keeping their standards a bit higher than what is allowed by FHA.
FHA loans, which are popular with first-time buyers, technically can be obtained by someone with a credit score as low as 620. However, the average credit score for FHA loans is 683.
Dreading talking with a lender because you’re saddled with student loan debt? Don’t be. You have options, including the U.S. Department of Education’s Revised Pay As You Earn Program (REPAYE). This program is an income-driven repayment plan and allows borrowers to cap their student loan repayment at ten percent of their salary. This is welcome relief to recent graduates. REPAYE allows the paying back of student loans in much smaller and manageable increments.
If you’ve been putting off buying your next home because of mortgage finance horror stories, it’s time you reconsidered. Call a REALTOR® you know and trust and ask for their insight into lending options such as some of the ones mentioned above. Due to changes in recent years, it just might be worth the short-term risk of a conversation to see whether you can qualify for a loan and commit to the long-term investment of property ownership. With the current competitive rental market in Greater Chattanooga, it’s likely you can invest in a home for less money per month than average rental rates.
If you are still concerned about speaking with a lender to get qualified for a home loan, perhaps the following results of an NAR survey of home buyers will help ease your mind. Forty-two percent of home buyers recently surveyed by the National Association of REALTORS® reported that getting a loan was “not that difficult.” And fifteen percent said it was “easier than expected.” It is still a great time to buy a home with low interest rates, but you do need to be aggressive with your offers to purchase because of the lack of inventory of homes to choose from. Call your REALTOR® today.