Almost every U.S. citizen of working age was greatly affected by the financial crisis that hit the country in 2008. Unemployment was high, people lost homes and there was widespread devastation throughout America. Due to how hard the financial crisis impacted the country’s economy, new financial standards have been implemented to help prevent that from happening in the future. However, what will these new standards mean for you when it is time to get a home loan?
What New Standards?
A new standard of accounting credit loss, Current Expected Credit Losses, or CECL, has been put in place by the FASB, Financial Accounting Standards Board. The new model replaces the old accounting standard, Allowance for Loan and Lease Losses (ALLL), which measured incurred losses while CECL measures the loss accrued during a loan’s lifetime.
What Does It Mean?
The new reporting model is intended to help with reporting transparency and will also require more data from financial institutions. Since banks are now essentially required to estimate what a loan recipient’s repayment capability will be throughout the loan’s lifespan, some individuals may find it harder to secure a loan than before. When it comes to avoiding another crisis, financial institutions must look way into the future when determining a borrower’s ability to repay the loan. Qualitative and environmental standards will still apply in some situations. For instance, a potential borrower’s asset quality, financial condition, business prospects and more may be deciding factors as well.
With the new standard in place, buying a home for the first time may not be as easy as it once was. It is important that you try to cover as much ground and dot all the Is and cross all the Ts if want to increase your chances of having your loan approved. If you are not in a very high income bracket, then you may have to come up with a hefty down payment as well as have a very good credit score and rating. If your credit isn’t the best, you can get a huge score boost fast just by paying your bills on time and lowering your credit usage. These two factors account for more than 70% of your score. Not only are they the most important, but they can also be the fastest to adjust.
Regardless of what new standards are implemented by banks, as a potential borrower, if you want to increase your approval chances, then you have to look good on paper. Lenders should be able to look at your financials and be confident in your ability to repay the loan.