Are Low Credit Scores Holding Back Home Sales?

homebse | Apr 1, 2010 |

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Many people would like to buy a home of their own but simply can't qualify for a mortgage loan under today's mortgage guidelines. Home prices are low and it is a good time to buy.

Is it just that prospective buyer's credit scores are too low or, is some of it that the mortgage guidelines have become much tougher making it harder for people to qualify?

Before the mortgage mess a prospective buyer could qualify for a 100% percent financing on a new home if they had a credit score of at least 580. Other guidelines had to be met as well, but from a purely credit score standpoint this was the guideline.

If they had 3% of the sales price to put down then from a credit score point they could qualify for a FHA loan which would also allow them to get a decent fixed interest rate.

Today, the best deal that one can hope to find is a FHA loan which requires 3.5% down and a minimum credit score of 620.

In addition, the credit reporting agencies have tweaked their credit score algorithm which is used to calculate credit scores so that they supposedly can better identify those that are not likely to repay any future credit extended to them. Therefore, when people go to check their credit score they have seen their scores drop without doing anything themselves to make their credit situation worse.

Other mortgage lender guideline restrictions that have kept people from qualifying are income requirements and how their income is reported to the IRS. People whose pay is reported by a 1099 and not a W2 will find it tougher to get a mortgage loan.

There was a time that mortgage lenders looked at 1099 income as gross income where today they have switched to looking at the net income reported on these people's income tax returns causing these people to pay a price for taking legitimate tax deductions.

FHA guidelines have also changed to disallow alternative credit to show a credit history when an applicant has zero credit scores. Some people have simply never established credit because they have always paid cash for items or have only purchased on credit from small companies who do not report to the credit reporting agencies.

In the past, FHA guidelines allowed for this type person to provide credit letters from their utility companies, cell phone companies, insurance companies and retail or car dealers where the person had previously had credit but that credit activity had not been reported to the credit bureaus. This proof of credit was known as alternative credit.

What we are seeing today is that only those who have established previous credit and have some of the highest credit scores are able to obtain approval for a home mortgage.

Therefore, it is imperative that you take good care of your credit health if you ever want to purchase a home of your own.

View Your Credit Report at least annually in order to stay on top of what is being reported about you to the credit reporting agencies and how your credit scores are fairing as a result of this information. Take time to be sure that all this information is yours and that it is accurate.