Qualifying quandary: The fear that keeps people from buying homes
Alison Keith sees a bright future ahead for her, her husband and their son. She graduated from nursing school in December and found a job at a local hospital soon after. Keith's husband is planning on going back to school himself.
But a lingering uncertainty keeps the Keiths from moving ahead with another goal they have: buying a home.
"My husband and I would like to buy a home," she says, "but are afraid that we won't qualify."
A loan for about $100,000 would be enough to get a modest home outside of Austin, Texas, where they now rent. The family's credit history is getting better, but then there are the car loan and student loan payments. And Keith says she doesn't know where to begin to find out if they would qualify for a mortgage.
She's not acting irrationally, nor is she alone. A new survey by loanDepot.com, an independent mortgage lender with headquarters in Foothill Ranch, California, and Plano, Texas, finds that worrying about qualifying for a mortgage is normal. Forty-six percent of potential homebuyers say fear is stopping them from going after the financing they need to buy a home. "They are not going to pursue it," says loanDepot.com spokeswoman Julie Reynolds.
But experts agree that a fear of not qualifying shouldn't stop people from trying. They say that conditions in the mortgage market may not be as bad as some people assume.
Reynolds says part of the reason people won't even begin the process of getting a mortgage is because they lived through the mortgage crisis and recession that began around 2008. "People lost hope," she says.
Of all the Americans who say they want to buy a home in the next two years, 71 percent are going to need financing, the survey found, and yet 89 percent haven't taken any steps to see if they could qualify for a loan.
"The American dream is still very much tied to home ownership with a significant segment of our population," Reynolds says. "And when you go through the economic hardships that so many Americans went through in the last 5 to 7 years, a lot of us are coming up for air now."
Gaynell Instefjord, an associate broker at Coldwell Banker Residential Brokerage in Draper, Utah, isn't convinced that lingering fears about the economy are keeping people from applying. She does notice concerns on an individual level, however.
"The concerns are about their own ability to pay and the security of their own job," Instefjord says.
But according to Reynolds, getting people started on the road to qualifying for a mortgage and purchasing a home is simply a matter of education about the process.
The survey found that most potential homeowners overestimate the difficulty of getting a mortgage. Forty-three percent of Americans think it is harder to get a mortgage today compared to a year ago. Only 18 percent think it is easier. However, the February Ellie Mae Origination Report found that the average mortgage approval rate is 55.3 percent compared to 49 percent in 2012.
Half of Americans do not know the minimum FICO score they would need to qualify for most loans — and 18 percent think their credit score needs to be in the 680 to 770-plus range. In reality, one third of all people who had loans close in February had an average FICO score below 700. Most loans, according to a loanDepot.com analysis, will accept a score lower than 680.
The required debt-to-income ratios have also been relaxed a little.
"For quite a few loans, the required FICO scores range anywhere from 620 to 680," Reynolds says. "The misperceptions are that it is harder to get a loan, the required debt-to-income ratio is too high, they think their FICO score is too low."
Instefjord, however, sees some ways in which qualifying could be stiffer.
"For instance," she says, "there are no longer stated income loans — a buyer has to show proof of all income from their employer. There is some rating of buyer quality that has to do with the down payment — a buyer with a greater down payment is less of a risk and so will get a lower interest rate."
John P. Evans, a sales associate at Gloria Nilson & Co. Real Estate in Pt. Pleasant Beach, New Jersey, also says lenders are looking more closely at a prospective buyer's income. "They look at more detail," he says. "They are more and more strict with the rules."
Evans also says that while the process may be tougher, more people are applying as the economy improves — which means more people are being approved.
A phone call to a mortgage lender, Instefjord says, can be the first step to qualifying for a home loan. "Answer a few questions about employment history, salary and debt and a good lender can tell them if they can qualify financially," she says. "The next step would be to have the lender pull a credit report to be sure their credit is adequate to qualify for the type of loan and the down payment required."
A credit report may cost about $50 or $60, and the process may take 30 minutes.
And what do people do if they find out they don't qualify?
"Find out why," Reynolds says. "If you work to clean up your credit, or need a longer credit history, or if you need to wait a few months or years to save up for a larger down payment, don't give up."
She acknowledges that getting one's financial house in order isn't fun and is sometimes tedious.
"But if we really think of it as a preparatory step that can help you achieve your financial, your investment and your lifestyle goals, it can be a motivator," Reynolds says.
What to buy
Evans says a bigger concern might be if a person does, in fact, qualify for a loan.
"Mortgage people love to tell you how much you qualify for," he says.
But he says people need to make sure to factor in the rest of their financial life — their monthly budget and so forth.
"Buy well below what you qualify for," he says.
In Austin, Alison Keith continues to work as a nurse and a mom and thinks about the quality of schools and the proximity a potential home could have to work.
"We made a lot of financial mistakes early on in our marriage but have been working hard to make things better for our son and ourselves," she says. "Getting me through school was part one of our plan. Having a home of our own with a low, set monthly payment and putting my husband in school are next on our list."
Maybe Keith does know where to begin after all.
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