How to Get a Mortgage In This Economy

Reader Question: I've heard that a lot of home buyers are having getting loans in this economy. Is this true? Is it hard to get a mortgage loan in this economy, and if so what can buyers do about it?

Let me start with the short and easy answer. Yes, it is a bit harder to get approved for a mortgage loan due to our current economic crisis. A lot of lenders have bad loans on their books right now, and they're not sure how or when they'll be able to recoup their losses (or prevent future losses, for that matter). So if you want to get a mortgage in this economy you will need to be a well qualified borrower, as defined below.

Now let me clarify some of these points. Lenders today are basically doing what they should have done all along. They are scrutinizing borrowers to make sure they are good candidates for a mortgage loan. They are reviewing the financial history of everyone who applies for a loan to see if there's a pattern of responsibility or negligence. This is a good thing, because it keeps both the lender and the borrower out of hot water down the road.

But we have only recently returned to these standards. For a while -- through the 1990s and into the early 2000s -- just about anyone could get a mortgage loan. Even if you had a bad credit score and tons of debt, you could find a subprime lender willing to offer you some "creative financing" to get you into a loan. As history has shown, this is a dangerous way to do business for all parties involved. Many of the problems we are having in this current economy are a direct result of the irresponsible lending that took place over the last 10 to 15 years.

So let's get back to your question: How can you get a mortgage loan in this economy given all the problems we are having?

Basically, you need to be a highly qualified candidate. The "best of the best," if you will. Homeownership has always been a reward ... something you had to strive for. But today, in this economy we are experiencing, you have to strive a little harder than you did a few years ago.

How to Get a Mortgage In Our Current Economy

Keep in mind that you might not have any trouble at all getting a mortgage in this economy, based on your current financial situation. It's true that some lenders are turning more people away these days, but a qualified borrower can still get financing in this economy. Of course, a lot of folks will have trouble getting approved for a mortgage in the current economic landscape. So for those people, I offer the following advice.

• Boost your credit score. As a result of the housing crisis and all of its symptoms, home buyers need a higher credit score in this economy if they want to (A) get approved for a mortgage loan and (B) get the best rate on that loan.
  
• Improve your debt-to-income ratio. Here again, the bar has been raised. If you want to get a home loan in the current economy you will need a more favorable debt-to-income ratio (DTI) than in the past. There are three ways to do this: Earn more, owe less, or a combination of the two.
  
• Pay down your debt. We just covered the importance of debt-to-income ratio when buying a home in this economy. You can increase your chances for getting a loan by paying down some of your high-interest debt (like those credit card balances).
  
• Save up for a down payment. And then some. In the past, you've probably heard about "zero down" mortgage loans, where you could get qualified based on your credit and income and then get financed for 100% of the home's sale price. Well, those days are behind us. At least for the time being. Most lenders in the current economy are requiring a 20% down payment across the board. If you can save more than that, by all means do so. You're going to need the extra cash at closing anyway.

I hope this answers your question, and I wish you all the best in your home buying experience. Good luck. If you think you're a qualified borrower, based on the criteria listed above, it might be a good time to move forward in the process. This would mean getting quotes from lenders, and you can do that from out online mortgage quotes page.