Here are seven mortgage fears that most home buyers have and how to face them.
1. I can’t afford the down payment.
Many Americans believe that you need a 20% down payment to qualify for a home loan. But a 2017 National Association of Realtors study finds that most homebuyers commit much lower down payments. For instance, first-time homebuyers generally put down 5%, while repeat buyers put down about 14%.
A 20% down payment is an attractive option because anything less will likely add private mortgage insurance (PMI) to your monthly payment on a conventional loan. PMI typically averages about 0.3% to 1.2% of the loan amount per year. That means on a $200,000 mortgage, your PMI could increase your payment by $600 to $2,400 per year or $50 to $200 per month. But paying PMI may be worth it if a 20% down payment leaves you strapped for cash.
If you’re struggling with down payment requirements, your state may offer down payment assistance programs to help bridge the gap. To learn about the help available in your area, search the US Department of Housing and Urban Development’s (HUD) website.
Also, consider that the minimum down payment required varies by the type of loan. For example, some lenders offer conventional loans that accept down payments as low as 3%. On the other hand, VA loans and other government-backed mortgages offer special 0% down payment programs for borrowers that meet eligibility requirements, like membership in the Armed Forces.
Since it’s possible to finance up to 100% of the loan amount, don’t let the down payment stop you from becoming a homeowner.
2. My credit score is too low.
The good news is that you don’t need pristine credit to get a mortgage. Conventional loans accept credit scores of 620 to 640, with higher scores generally resulting in lower interest rates.
Although the government doesn’t set credit minimums for VA or USDA loans, you may qualify if you have a 580 FICO score or higher. FHA loans require a minimum score of 500, but most lenders won’t go that low. They typically want to see a credit score of at least 580. Anything less requires a down payment of 10%.
Some excellent first-time home buyer advice is to work on your credit score for at least a year before purchasing. One of the best ways of doing that is getting your credit report and scores. By keeping close tabs on where you stand financially, you can look for weak spots and have a plan for improving them.
It is vital to remember that improving your credit score will lead to a more favorable interest rate and terms.
3. I have too much debt.
Just because you carry debt doesn’t mean you should shy away from a mortgage or potential homeownership. Get a sense of your financial health by calculating your debt-to-income ratio — or your DTI — a metric lenders use to determine your ability to repay a mortgage.
To calculate your DTI, total up all of your monthly expenses, such as your rent or another housing payment, student loans, and credit card payments. Divide that total by your income before taxes to get your DTI.
Let’s say you spend $900 a month on recurring expenses, and you bring home $3,000 a month. Dividing $900 by $3,000 results in 0.3 — or 30%. Your debt-to-income ratio is 30%.
Most lenders prefer to see a DTI of 36% or lower, with a maximum ratio of 28% going toward your housing expenses. But you can find lenders, like the mortgage banker Movement Mortgage, willing to accept DTIs as high as 43%, with housing costs taking up to 31% of your pretax income. The DTI threshold largely depends on the loan program.
But just because you can qualify for a loan doesn’t necessarily mean you should add one to your expenses. Carefully monitor your financial obligations to make sure you can comfortably afford a mortgage before taking on more debt.
4. I don’t make enough money.
Lenders don’t typically advertise minimum income thresholds for approving mortgages. Instead, they prefer to rely on your debt to income ratio or DTI — how much you earn versus how much you pay out each month — to determine whether you make enough to repay a loan.
If your DTI ratio checks out, play with an online mortgage calculator for an idea of how much you can borrow and the monthly payments you might be able to afford. If you focus on less expensive properties, you may find yourself more comfortable with the monthly payment.
5. If I lose my job, I’ll lose my house.
Mortgages are loans secured by the residence you’re buying. So it’s possible to lose your home if you find yourself unable to repay what you’ve borrowed. But foreclosure is a complicated process that many lenders consider a last resort. Instead, the Consumer Financial Protection Bureau and other experts advise you to contact your mortgage servicer as soon as you know you might miss a payment.
Many lenders offer programs and assistance to keep you in your home. A first step may involve your mortgage servicer asking you to apply for mortgage assistance so that it can review any loss mitigation options. For instance, some lenders may temporarily suspend or reduce your payments. Another possibility may be to change one or more of the original loan terms, which may lower your monthly payment.
Other options are talking to a HUD-approved housing counselor in your state. These counselors review your situation and guide you through your options with your lender. They also match you with assistance programs you can qualify for.
Of course, the best strategy is to avoid missing any payments until you can find another job. It’s why some lenders require proof that you’ll have enough cash left over after closing — called your mortgage reserves — to cover housing expenses for a few months if you’re without a job.
6. I won’t get approved for a mortgage.
If you’re worried about approval, you have a reliable way to see how you’d stack up when applying for a mortgage: preapproval.
To get preapproved for a mortgage, you provide a lender with necessary personal and financial information. Your lender then evaluates your financial situation and runs your credit to see if you qualify for a loan, providing you with an estimated interest rate and how much you may be able to borrow.
Final loan approval comes after you’ve chosen a home when the lender conducts a more thorough investigation of your finances. But preapproval gives you an idea of where you stand — and even a leg up when you put in an offer on a home. It shows sellers that you’ve done your homework.
You can apply for preapproval with more than one lender, using the results to compare mortgages and better increase your chances of approval. Just keep multiple preapproval requests within a 45-day window so that all credit checks count as one inquiry, so your credit score doesn’t take as big of a hit.
7. I’ll probably get a terrible interest rate.
Your lender weighs many factors when calculating your interest rate. To best position yourself for the lowest rate you’re eligible for, brighten up your borrowing power by boosting your credit score, paying down debts and saving up for a higher down payment.
On top of that, average mortgage rates in 2019 were the lowest they’ve been in five decades, averaging 3.90%. And housing agencies nationwide, like Fannie Mae and Freddie Mac, are predicting sub-4% average mortgage rates in the coming year.
Keep your finger on what’s out there by comparing advertised rates across lenders and mortgage types. And keep up to date with developments in real estate for trends in home buying and selling.
A mortgage is an expensive transaction with a rewarding payoff: homeownership. With careful planning, you’ll know what you can afford, helping you to research the best mortgage and lender for opening the door to your new home.
About the author: The above article on common mortgage fears was written by Kimberly Ellis. Kimberly is a writer at Finder specializing in home loans. She hails from New York City with a BA from Queens College. She has written extensively about the real estate and finance industries. Kimberly is also a language lover and aspiring polyglot.