From the Crisis, New Rules
According to CNN, house foreclosures in 2008 were up 81 over the previous year, and 861,664 families lost their homes during that tumultuous year. Lessons learned during that crisis led to changes in real estate practices and lending laws, with the goal of ensuring that home buyers ultimately purchase houses within their budgets.
You’ll Need a Bigger Down Payment
Before 2008, many lenders accepted down payments of 1 percent of the cost of the home—or even no down payment at all. As a result, some homeowners ended up without a lot of skin in the game, making them more likely to walk away from the mortgage when their home values dropped below the amount they still owed. Today, you’ll need to pay a minimum of 3.5 percent of a home’s value before you’ll get a loan.
Loan Preapproval Is Vital
It used to be a nice gesture to get preapproved for a home loan before you started shopping for a house, and the process wasn't particularly rigorous. These days, getting preapproved is more than a sign of goodwill toward the seller; in fact, if you don't have preapproval, a seller may not accept your offer. Savvy sellers and their agents know it’s tougher to get approved for a mortgage in today’s market, so not having a preapproval in hand could be a deal breaker.
Fewer Available Loan Options
Before the crash, and when home values were on the rise, you could choose from interest-only loans, balloon payment loans, and adjustable-rate mortgages (ARMs) with high caps because lenders were confident that your house’s value would increase in just a few short months. After the housing crisis, the Consumer Financial Protection Bureau (CFPB) stopped lenders from making risky loans and instituted stricter standards to ensure that home buyers would have the ability to repay their mortgage.
You’ll Need a Better Credit Rating
The minimum FICO score—that three-digit measurement of creditworthiness—required to obtain a home mortgage has increased. A few years ago, you might have qualified for a mortgage if your score was below 620, but it’s unlikely that you'd be able to buy a home today with a score that low. In addition, if your score is less than 760, lenders will consider you a riskier prospect and may charge you a higher interest rate.
Real Estate Agents May Discourage Expensive Homes
It’s not just lenders who have changed their practices. Buyer’s agents (real estate agents that represent buyers) may steer you away from showings of houses that are asking for more than your preapproval amount. While it used to be easier to get a loan for a house that was over your budget, today most lenders won’t budge, so real estate agents consider it a waste of their time to show out-of-range homes.
Lower Debt-to-Income Ratio
Before approving you for a mortgage, the lender will analyze all your current monthly payments (car notes, credit card bills, revolving accounts) and compare them with your monthly income. These days, lenders are looking for a debt-to-income (DTI) ratio of 36 percent or less, while before the housing crisis, some lenders were approving mortgages for home buyers who had DTI ratios as high as 50 percent.
Home buyers used to find the older terms “listing agent” and “selling agent” confusing. As a result, in many states the terms are now “buyer’s agent” and “seller’s agent.” This change makes it clear to both buyers and sellers which type of agent they should seek out.
You’ll Receive More Information
As a way of helping home buyers understand the true costs of buying a house, the CFPB established “Know Before You Owe” regulations. These require lenders and real estate agents to supply you with a Loan Estimate and a Closing Disclosure that spell out important information, including the monthly payment, anticipated taxes and insurance, special features of the loan, and closing costs.
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