Credit Crunch Woes: Getting a Loan is a Lot Tougher

By: Ryan

Remember the good old days? You find a home or investment property in a booming neighborhood, you get an offer accepted, and you close on your new home, and your average credit score granted you a fantastic mortgage with no hiccups and no questions asked. Finally amateurs could play with the big boys and get rich quick flipping houses.

Let's be honest. It was quite evident that banks were being too lenient approving loans, and lenders had no problem pushing paperwork through with no documentation and taking commissions on mortgages they knew were overextending the buyer. The process was highly unregulated, and as a result the economy as a whole is suffering, and the end is nowhere in sight. Housing inventory and foreclosures are at record highs. Housing prices are dropping and many businesses are suffering as a result. The credit crisis will continue to disrupt businesses, the economy and consumer spending, and personal finances for months to come.

What About Those With Good Credit?

The credit crunch, mortgage meltdown, whatever you want to call it, only affects those with poor credit ratings who have adjustable rate mortgages, right? Sadly that's not the case. To put it in basic terms, financial institutions gambled with mortgages and now, as a result of the foreclosure rate, they are tightening their borrowing requirements and being more selective with granting loans. Just like it used to be.

What Does This Have to Do With Me?

If you are planning to buy a home, need a car loan or even a line of credit, things are changing if they haven't already. Some of the creative financing terms, such as no documentation and no money down loans, which made it possible for people who couldn't actually afford to buy a home under ordinary terms, will disappear. Now, just like the days before creative financing become an acceptable option, you will actually have to prove that you are creditworthy. To prove this you will need an acceptable credit score that shows you pay your bills and your income is greater than your expenses.

The New Perfect Credit Score

John Ulzheimer, president of consumer education at Credit.com told Money Magazine, "A year ago a credit score of 720 would have been good enough to get you the best rate. Now to get the same deal, you've got to be in the 750 range." So what does this mean? While your credit score has always been an important report card lenders used to judge your ability to repay a loan, an outstanding credit score is even more important going forward in order to receive the best rates and keep your payments down.

Request a free copy of your credit report every four months from one credit reporting agency at AnnualCreditReport.com. Review your report closely to look for errors that need your attention. Keep your debt to available credit ratio on your credit cards below 30 percent and pay your bills on time. These two factors alone account for 65 percent of determining your credit score.

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