Tightening lending standards, what they mean for buyers

If I were house-hunting right now, I would be scared about getting my loan. The lending rules are changing daily – sometimes a couple of times a day – in reaction to the credit crisis. I can’t really blame those giving out the money; these are hard times for mortgage lenders.

I am self-employed, so I don’t fit into the “standard” categories for great borrowers. If the rules change in regard to how my self-employment income is counted, I might fail to qualify. My options for getting a loan based on my stated (but undocumented) income have all-but disappeared. If I need a second mortgage to avoid PMI, I may be out of luck. The pre-approval I got last month may no longer be accurate. I am a good borrower, but not a great one.

What makes a great borrower?

1. Good credit score.

2. Steady employment (on payroll is better than self-employment – that’s my weak spot.)

3. Good income to debt ratios: One measures how much you will owe for the house compared to your income. The second measures how much you owe on all your debt compared to your income.

What can you do if you are not a great borrower?

The obvious thing is to check with your lender. Also, check again before you make an offer to purchase. If the lending rules continue to shift like sand under your feet, you may need to borrow less, or improve you credit score, employment or ratios before you can buy.