When the financial crisis hit in 2007, the world changed—not just for the big banks and brokers, but also for everyday folks looking to own the roof over their heads. While we’ve thankfully rebounded from the depths of the crisis, there’s little doubt we’re still living through a genuine home ownership crisis.
Today, aspiring Americans from all walks of life struggle to get mortgage loans, whether to buy a new home or refinance. To give you a sense of just how tough it’s become, former Federal Reserve Chairman Ben Bernanke, our nation’s most famous banker for the past eight years, was recently denied a mortgage to refinance his home http://money.cnn.com/2014/10/03/real_estate/bernanke-refinance.
Although he makes a reported $250,000 per speaking appearance, he no longer has a day-to-day paycheck—W-2 income—and that’s a red flag for today’s risk-conscious, computerized mortgage approval process. You can imagine how the average citizen is faring. In 2012, close to $100 billion of mortgage applications were denied by the GSEs. That includes approximately 250,000 households who would have qualified for mortgage financing just 20 years ago are now turned down every year (source: HomeLPC estimate). These denied applicants are light years from the no-job, no-income NINJA approvals at the height of the boom.
As of December 2013, the average denied applicant by a Fannie Mae, Freddie Mac or other government-sponsored enterprise had a FICO score of 725, debt-to-income ratio of a comfortable 26% and were prepared to make a generous down payment of 19% percent. On average, applicants denied in 2012 were as creditworthy as approved borrowers from 2002 (source Ellie Mae).
So should folks just wave the white flag and give up on buying a home?
The answer is an unequivocal ‘no,’ as there’s far more they can do than they may realize. For starters, build up and improve your credit. It’s a process, but there are numerous resources available, from personal credit counselors to support from your local bank. You should also make sure you understand the mortgage approval process, that is, what banks are looking for and why. And there are numerous resources that can help, (http://knowyouroptions.com/news/credit-coaching-modification-success). The more you know, the better prepared you will be to apply and be approved.
Finally, there are alternatives to put you on the road to home ownership faster. In recent years, several real estate investment firms, including our company, HomeLPC, have launched to help keep Americans’ home ownership dreams alive. For qualified applicants, these investment companies will purchase the home of their choice, then lease it to them until they are ready to buy. As part of the process, the aspiring homeowner makes an option-to-buy payment, and potentially benefits from home value appreciation along the way.
There is of course no single solution or answer to the current home ownership crisis, and each individual, family or household will have to figure out their own road forward. Motivated buyers, however, can take steps to improve their credit ratings, strengthen their applications or pursue alternative routes to home ownership. Americans can still fulfill their dreams to own a home, but until the economy picks up real steam, and banks start lending more freely, it’s not going to be easy—even for the best qualified among us. Just ask Ben Bernanke.
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