We break down the common misconceptions of getting a mortgage approval, and offer some clarity on those looming fears that may be keeping you from getting your foot in the door of both a mortgage lender, and your new home.
Congratulations! Consider yourself one step closer to homeownership. Seriously!
With 2017 on the horizon, there is no better time than now to research and plan for the year ahead, especially if you’ve been going back and fourth with the idea of making one of the biggest purchases of your life- buying a home. Maybe you’re afraid that you don’t make enough money or have enough money saved up for a down payment. Or maybe you think your credit score is too low and your debt too high.Whatever the case may be, you’re doing yourself a disservice by just assuming you won’t qualify, when in actuality, the odds of success are greater than you think! In fact, more than 7 out of every 10 applicants get the financing they need, and the home they want, according to data compiled by Ellie Mae (a California-based technology firm whose software is used by many mortgage lenders)*.
Ready to leave those worries and fears behind in the new year?
We sure hope so. You have nothing to lose.
Let’s start our “fear dissection” with the biggest fear of all- MONEY MONEY MONEY.
“I don’t have enough money saved up for a down payment.”
It shouldn’t come as a surprise that many hopeful first-time homebuyers share this same concern. That’s why the array of loan products available today were created and tailored to each type of buyer- everyone is different! In a previous post, we discussed the most common loan products buyers qualify for (click here for more) which you can refer to as we go on.
In terms of down payments- you definitely have options, the most common being with conventional, FHA, and VA loans.
The average down payment for conventional loans is 20%, according to recent Ellie Mae data. Just remember, average doesn’t mean lowest. Many borrowers put down less than 20% by agreeing to buy private mortgage insurance, a policy that protects lenders if you default. Homebuyers who go with FHA loans put down an average of 3.5%, although that type of financing requires a more costly form of mortgage insurance. Borrowers who take out VA loans put down just 2% and never have to buy mortgage insurance.
“I don’t think I make enough money to afford a mortgage.”
What’s enough money?
Most lenders want your monthly housing costs (mortgage payment, insurance premiums and property taxes) to consume no more than 28% of your gross income. On this point, you won’t find much difference among the three major types of mortgages as above. According to Ellie Mae, housing costs average 23% of income for conventional loans, 28% for FHA loans and 24% for VA loans.
If it’s not enough to buy the homes you’ve been looking at, don’t give up. Just consider less expensive properties that require a smaller loan
“Student loans, credit cards, and my car payment have me buried in debt.”
In this day and age, carrying debt is the norm. It’s expected, and helps to build up credit. Don’t just look at the bills on your desk and assume no one will lend you more to buy a house or condo.
Lenders usually don’t want you spending more than 36% of your total income on recurring monthly debts. Let’s say you’re paying $400 a month on your student loans, another $400 on credit card debt, $300 on a car loan and expect a mortgage payment, including taxes and insurance, of $700.With a monthly pretax income of $5,000, your debt-to-income ratio is right at 36%, just slightly above the average debt-to-income ratio of 34% for conventional loans. Can’t quite make the cut for the conventional loan? The average debt-to-income ratio rises to 40% for VA loans, and 42% for FHA financing.
“My rent is outrageous as it is. There is no way I can afford a monthly mortgage payment.”
Perhaps the most debated topic between first-time homebuyers is renting vs. owning today. This debate is even more popular now as housing prices and monthly rent payments are climbing higher and higher, especially in our Reno/Tahoe area.
A recent analysis by RealtyTrac, a California-based provider of housing data, found it was cheaper to make monthly payments on a three-bedroom home than to rent the same type of property in 58% of U.S. markets. The other part of the debate of renting vs. buying is that you seemingly throw away money at a landlord every month, thus not building equity you could be putting in your purchased home.
“I think my credit score is too low.”
You aren’t alone in that, and you can definitely be among the 3 out of 4 consumers with a credit score below 700 and qualify for a mortgage. Some even qualify with scores BELOW 600! The average FICO credit score for a conventional loan is 753, according to Ellie Mae. That falls to 707 for VA loans and a much lower 686 for FHA financing.
Don’t forget that you can always raise your credit score, and sometimes much faster than you would think, too! Your trusted mortgage lender will gladly assist you with every step of the way.
“Even if I were to get approved, I will end up with a terribly high interest rate.”
Although mortgage rates aren’t as low as they were in the beginning of 2016, they are still near all-time lows, and you could actually pay less for an FHA or VA loan with looser qualifying requirements! According to Ellie Mae, the average cost of a 30-year fixed-rate conventional loan (including purchases and refinancings) is 3.82%. That falls to 3.74% for FHA financing and 3.53% for VA loans because you have the federal government standing behind you. Your local mortgage lender can provide you with the most current and accurate rates available in your area as they can change daily.
“I would hate to go through the entire home-buying process just to get turned down for a loan.”
The first step you should take in the home-buying process, is getting pre-approved by a mortgage lender just to get an clear view on where you financially stand. Getting pre-approved will also give you a good idea of how much house you can afford, so you aren’t spinning your wheels, as well as the wheels of sellers and your real estate agent.
The pre-approval process usually comes at no cost to you (besides your time gathering pertinent documents needed by your lender), and in turn you’ll get a letter stating the maximum amount that lender is willing to provide. Not only will that boost your confidence, but being pre-approved for financing is a must in many cities where the most desirable houses are only on the market for a few days, or even hours, and especially in today’s market. Many realtors won’t even show you properties without one. Pre-approval also puts you in the strongest possible position to win a bidding war against buyers who are paying cash or have also been pre-approved. Of course, final approval on any mortgage depends on the house you choose to buy because lenders must agree that it provides reasonable collateral for the loan.
~As the saying goes, “You won’t know until you try.” ~