Why It Has Become Difficult To Secure A Mortgage

By Author: Bonny Kominek
Total Articles: 32
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The fallout from the credit crunch and global financial meltdown has made it harder to secure a mortgage than it was a few years ago ? here is a brief background as to how and why this happened.

The tightening up of mortgage lending rules is a symptom and manifestation of the credit crunch. The credit crunch first arose when the institutions comprising the international banking community started losing confidence in loaning money to each other.

The origin of the problem was largely in the U.S.A, where large numbers of ''sub-prime'' borrowers were granted mortgages ? sub-prime meaning less than ideal candidates for a mortgage ? in other words, bad risks.

Thirty years ago, this would have been a problem for the banks granting these mortgages, but not the entire financial system. The reason that the sub-prime ''market'' caused such a catastrophic problem is because these risky loans - with a high potential to turn into bad debts - were sold on in complex financial packages, bundled together with other less risky investments.

Massive investment by banks in such bundles generated huge growth for a time, ...
... and the high risk of defaulting borrowers in the sub-prime market was supposed to be off-set by the way that financial bundles were put together.

In reality, many of the top people running the banks were unaware of how these new financial instruments worked - and the risks involved. When large numbers of sub-prime mortgage holders began defaulting on payments, the value of the financial bundles plummeted; and with it the value of massive amounts of investment by the banks. This affected the underlying value of the banks themselves, which lead to the banks becoming reluctant to loan to each other. When the banks would not loan to each other, the knock on effect was always going to be a squeeze on credit for businesses and individuals ? the credit crunch. The credit crunch in turn stifled growth in the economy, and lead to recession.

In response, both the government and the banks have made lending practices more stringent, and will loan a lower figure in proportion to the recognized household income than previously. In addition, your credit score has become increasingly important when applying for a mortgage.

As your credit rating can be adversely affected by a mortgage application refusal, it is crucial to avoid making an unrealistic application, as this will in itself make it even harder to succeed with subsequent applications. Go online and use one of the freely available mortgage calculator tools before making a formal application; these are provided both by banks like Alliance