With home prices and rates still relatively high, securing a mortgage can feel daunting––even to the most experienced borrowers. But don’t let that deter you: If other homebuyers’ experiences are any indication, odds are you’ll eventually find a home loan that works well for you.
In fact, most U.S. homeowners say they’re satisfied with the mortgage they received, according to a recent Bankrate survey. The vast majority of the surveyed homeowners (69%) said they’d buy their current home again if they had a do-over.
Mortgage preparation is often overlooked by homebuyers, leading to issues during the buying process. Let our team at Just Livin' Realty Group in Denver assist you in getting prepared to place winning offers. Contact us at 720-799-2202 or watch our informative video.
When searching for the perfect home loan, the key lies in finding one that aligns with your long-term comfort. Beyond comparing mortgage rates and term lengths, it’s crucial to assess how well the loan integrates into your daily life and personal preferences.
For instance, consider introspective questions like: Are you inclined towards risk-taking, or do you lean towards structured plans and stability? Can you accommodate a potential increase in mortgage payments if interest rates rise, or are your projected home-related expenses already pushing the limits of your monthly budget?
To kickstart your journey, we’ve outlined four pivotal factors to contemplate as you narrow down your array of mortgage options.
1. Your Credit Score
Your credit score, the three-digit number designated by credit scoring firms like VantageScore and FICO, not only impacts your interest rate but also dictates the mortgage type you qualify for.
To secure a conventional mortgage from a leading bank or credit union, a FICO score of at least 620 is typically required. However, certain mortgage categories demand higher credit scores. For instance, to be eligible for a U.S. Department of Agriculture (USDA) loan for purchasing a qualifying rural property, a minimum FICO score of 640 is necessary. Similarly, if you’re eyeing a substantial loan such as a jumbo mortgage (exceeding $766,500 to $1,149,825, depending on the property location), a FICO score of 700 or more might be a prerequisite.
You still have options, though, if your credit score is lower. You may be able to get a Federal Housing Administration (FHA) loan with a 580 credit score if you have enough cash saved for at least a 3.5% down payment. And if you have at least a 10% down payment, you may qualify even if your score is in the 500 to 579 range. Alternatively, if you’re a military service member, veteran or spouse, you may be able to get a U.S. Department of Veterans Affairs (VA) loan with little or no money down with a credit score in the 580 to 620 range.2,3
Some regional banks and credit unions may also be more flexible than others with minimum required credit scores.4 But if you can afford to wait, you may be better off paying down your debt first so your score can improve. The interest you save with a more competitively priced loan could enable you to buy a more desirable home.
2. Your Income and Expenses
The amount of money you make, as well as how much you owe, will also influence your mortgage options.
Lenders like to see that you still have plenty of income left over after paying your expenses and generally prefer that you spend no more than 28% of your income on housing, or a maximum of 36% (which is the cap that federally-sponsored lenders Fannie Mae and Freddie Mac advise).5
A mortgage lender will also compare your expected income to the total amount of debt you’ll carry once you’ve bought the home.6 This is called your debt-to-income (DTI) ratio, and lenders consider it a key indicator of whether you can afford a particular mortgage. In fact, research by NerdWallet found that a high DTI ratio is the most common reason mortgage applications get rejected.6
In addition to outstanding debts, lenders factor in other expenses unique to a home, such as property taxes, homeowners insurance, and homeowner association fees. Your approval odds will be higher if you have a DTI ratio below 36%.7 But if you have great credit and ample cash, you may still be able to get a conventional loan with a DTI ratio in the 45% to 50% range.8 If not, you will likely need to look to other “non-conforming” loan types, such as government-backed mortgages.
With an FHA loan, for example, you may be able to get away with a DTI ratio of 43% to 57%, depending on your credit history and savings. Similarly, if you qualify for a VA loan, you may be able to get one with a DTI ratio of 41% or more. USDA loans, on the other hand, are a bit stricter. To get approved, your DTI ratio can’t be higher than 41% and your income must be below a certain threshold for your family type.6
3. Your Expected Down Payment
When considering your expected down payment for a property in Denver, it’s essential to understand its impact on the mortgage options available to you. While a conventional mortgage typically requires a 20% down payment, this is not a strict rule. In fact, the National Association of Realtors reported that the median down payment amount in 2023 was 14%, with younger buyers under 33 years old averaging an 8% down payment.
Having a larger down payment can open doors to additional loan opportunities. For instance, self-employed individuals often face challenges in obtaining a mortgage, but a down payment exceeding 20% may increase their chances of approval with certain conventional lenders.
If liquidity is a concern, exploring FHA loans could be a viable option, as they require only a 3.5% down payment. Alternatively, qualifying for a USDA or VA loan might eliminate the need for a down payment entirely, except for a minor funding fee.
It’s important to note that a smaller down payment usually translates to a higher monthly mortgage payment. Additionally, opting for a lower down payment means more interest payments over time, potential mortgage insurance obligations, and a larger principal amount. With conventional loans, private mortgage insurance (PMI) is mandatory for down payments below 20%, while FHA loans always require insurance coverage.
The cost of mortgage insurance can vary based on factors such as loan type, size, credit score, and loan terms. For example, FHA mortgage insurance premiums (MIPs) generally carry higher costs than PMI and may entail upfront payments along with annual premiums. Insurance for adjustable rate mortgages (ARMs) tends to be relatively more expensive as well.
4. Your Lifestyle and Risk Tolerance
In addition to your budget, one of the crucial factors to consider when evaluating mortgage options is your lifestyle and risk tolerance.
For most individuals, a mortgage represents a significant long-term commitment. Thus, it is vital to select a mortgage that aligns well with your lifestyle and allows you to comfortably manage repayments over time.
Typically, fixed-rate mortgages span from 15 to 30 years or even longer, with 30-year terms being the most prevalent choice. When opting for an extended repayment period, monthly payments are lower, enabling gradual reduction of debt over time. However, this means paying a higher amount in interest.
On the contrary, a shorter mortgage term leads to lower overall payments but higher monthly installments. While some homeowners prefer the long-term savings, it may require significant lifestyle adjustments, which could lead to regrets.
Alternatively, selecting an adjustable-rate mortgage (ARM) with a low fixed APR for an initial extended period (often five, seven, or 10 years) before transitioning to a variable rate can reduce monthly payments in the short run. This option is beneficial if you plan to occupy the property for a limited time. However, it’s essential to be cautious as ARMs pose risks if you are unprepared for potential interest rate increases.
BOTTOMLINE
Fortunately, I am also a mortgage professional who can explain your options, answer your questions, and help you find the best loan to meet your needs.
We can also develop a custom plan for securing a great home that fits your budget. Reach out when you’re ready to get started.
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
- Bankrate – https://www.bankrate.com/mortgages/home-affordability-report/
- Bankrate – https://www.bankrate.com/real-estate/what-credit-score-do-you-need-to-buy-a-house/
- U.S. News & World Report – https://money.usnews.com/loans/mortgages/va-loans
- Newsweek – https://www.newsweek.com/vault/mortgages/bank-vs-credit-union-for-mortgages/
- Bloomberg – https://www.bloomberg.com/news/articles/2024-05-17/how-much-income-do-you-spend-budget-for-home-mortgage-in-us
- NerdWallet – https://www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage
- Bankrate – https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/
- Bankrate – https://www.bankrate.com/mortgages/how-interest-rates-are-set/
- National Association of Realtors – https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf
- Bankrate – https://www.bankrate.com/mortgages/self-employed-how-to-get-a-mortgage/
- Bankrate – https://www.bankrate.com/mortgages/no-down-payment-mortgage/
- CFPB – https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
- Bankrate – https://www.bankrate.com/mortgages/basics-of-private-mortgage-insurance-pmi/
- MPA Magazine – https://www.mpamag.com/us/mortgage-industry/guides/the-7-most-popular-types-of-mortgage-loans-for-home-buyers/255499
- Investopedia – https://www.investopedia.com/articles/personal-finance/042015/comparison-30year-vs-15year-mortgage.asp
- NerdWallet – https://www.nerdwallet.com/article/mortgages/adjustable-rate-mortgage-arm
- Federal Reserve Bank of St. Louis – https://www.stlouisfed.org/on-the-economy/2024/feb/which-households-prefer-arms-fixed-rate-mortgages
- LendingTree – https://www.lendingtree.com/home/mortgage/shopping-around-survey/