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Local home sales up, but qualifying for mortgage loans still a challenge

Qualifying for a mortgage loan remains a challenge for today’s home buyers, in Chicago and across the nation.

That’s the message from a recent story in the Naperville Sun.

According to the story, the number of home sales throughout the Chicago area is on the rise. This is good news. It could be a sign that the local economy is on a steady, if slow, path to recovery.

The Naperville Sun story, though, quotes local banking professionals who say that qualifying for a mortgage loan remains a challenging task for many would-be buyers.

This is largely because during the housing boom banks and lenders tended to pass out too many mortgage loans to buyers who could not afford to make their monthly mortgage payments. This led to a surge in foreclosures in Chicago and across the nation.

Today, banks and lenders are more cautious. They want to make sure that home buyers have high enough incomes and low enough monthly debt levels to afford their monthly mortgage payments. They’re also relying heavily on buyers’ three-digit credit scores to determine whether buyers have a history of paying their bills on time.

Here’s some of what you should expect when applying for a home loan. First, know that your lender will check both your front-end and back-end ratios. These ratios tell lenders whether you have the monthly income to afford the size mortgage loan for which you are applying.

The front-end ratio only takes into account the relationship between your gross — pre-tax — monthly income and the amount of your monthly mortgage payment, including principal, taxes and homeowners insurance. Generally speaking, lenders want your mortgage payment to take up no more than 28 percent of your gross monthly income.

Your back-end ratio compares your gross monthly income to all of your recurring monthly debts, including your mortgage payment, credit-card minimum payments, student loans and car loans. Lenders typically want your total debts to eat up no more than 36 percent of your gross monthly income.

Then there’s your credit score. If you have a history of missed payments, or if you’ve declared bankruptcy or suffered through a foreclosure in the recent past, your three-digit credit score will be low. Lenders reserve their lowest interest rates for those borrowers who have FICO credit scores of 740 or higher. If your FICO credit score is lower than 620, you’ll struggle to qualify for a mortgage loan at any interest rate.

Remember, banks and lenders today are cautious about lending money to borrowers unless they are certain that these borrowers can make their payments. Before you apply for a mortgage loan, then, make sure that your finances are in order.

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