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The days of subprime lending have drawn to a close. Being that this type of lending was the cause of the collapse of the housing market, banks and lending institutions do not even entertain the idea of lending in a subprime fashion. Today, buyers have to meet the qualifications for both credit and income, usually of a median FICO of 750. This has caused a major stall in the sale of homes because the lack of subprime lending simply eliminates nearly 40% of potential buyers.
Debt to Income Blow Out
People had grown accustomed to living beyond their means, and this includes the accumulation of debt. During subprime lending, borrowers could have their mortgage payment take approximately 43% of their gross income, while leaving the rest to deal with bills and other expenses. When looking at the net income of borrowers, the new mortgage payment would take about 60% of their income. The strain was overwhelming for most, thus the huge foreclosure rate that is present today. Banks will consider buyers that have an average of 10% to 15% debt from their gross income, and not allowing them to max out in mortgage bills beyond 35% of their gross income.
Ideal for a Mortgage
The ideal buyer for a mortgage should not have more than 35% used on credit cards, and little to no debt on their credit. The reason for this is that many companies are shy about their lending in this shaky housing market. This means that many buyers are looking for homes that they can easily afford. This has made smaller homes, apartments and condominiums very appealing to today’s buyers. The perfect mortgage scenario for people is to keep their payment within the 25% of their net income.