Tough Truth about the Credit Crunch

If you’ve been considering buying a home using a traditional 30- or 15-year fixed-rate mortgage, then you’ve probably got credit scores on the brain. And, if you’re like most potential homebuyers, you probably also are dealing with a major misconception about the home buying process: namely, that the “Credit Crunch” is likely to prevent you from actually purchasing your home. Back in the mid-2000s when the housing market crashed, lenders got very, very tough in their lending requirements. They required high down payments (20 percent) and great scores in order to offer up home loans. However, in today’s real estate market, those requirements have substantially loosened. Most would-be buyers are not aware of these changes.

For starters, the era of 20-percent down payments is largely over. While most resources for homebuyers still recommend you save up this hefty sum, Fannie Mae, Freddie Mac, and a number of the “mega banks” now are offering down payment programs as low as three percent for first-time homebuyers, and even buyers with a foreclosure on their record from the early days of the crash can cite a number of hardships and get their down payments dramatically reduced. In fact, there are even zero-down-payment loan programs out there for certain qualified buyers.

Next, consider how you pay your other bills. You know that your credit report plays a huge role in determining how much you can borrow on your new home, but a new change from Fannie Mae that will go into effect this summer will dramatically affect this as well. Fannie Mae researchers determined that individuals who pay off their credit card balances in their entirety every month are 60 percent less likely to become delinquent on their mortgages, and those who never exceed their credit limit are 75 percent less likely to do so. As a result, Fannie Mae is about to start giving huge weight to borrowers who have a good credit-card track record, and that could mean that 12 to 24 months of “good behavior” (that’s as long as the GSE plans to track your record) could be huge for your borrowing ability even if you have a lower debt-to-income ratio than lenders traditionally like to see.

Do you think that the “credit crunch” is over? Is that a good thing or a bad thing for the housing market?

Your comments and questions are welcomed below.

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