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
loan that works well for you.[1]
The key to finding the right mortgage is to
look for one that you’ll feel comfortable with long after you've closed on your
new property. In addition to comparing term lengths and interest rates, also
consider how the loan will fit your daily life and preferences.
For example, we recommend asking yourself
questions such as: Are you a natural risk taker, or do you prefer firm plans
and predictability? Can you afford a bigger mortgage payment if interest rates
increase, or are your anticipated home expenses already stretching your monthly
budget?
To help you get started, we've rounded up four
of the most important factors to consider when narrowing your list of potential
mortgage options.
1. Your Credit Score
To secure a conventional mortgage, you'll
typically need a FICO score of at least 620, but some mortgage types require
even higher credit scores.For example, to qualify for a U.S. Department of
Agriculture (USDA) loan on a qualifying rural property, you'll need a minimum
score of 640. Or, if you're seeking a jumbo mortgage (home loans above $766,500
to $1,149,825, depending on where you buy), you may need a score of at least
700 or more.[2]
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 score as low as 500 if you have at least a 10% down payment. Some
regional banks and credit unions may also be more flexible with their
requirements.[3]
2. Your Income and Expenses
When evaluating your creditworthiness, a
lender will compare your income to the total debt you'll carry once you've
bought the home.[4 This is called your debt-to-income (DTI) ratio, and it’s
considered a key indicator of whether you can afford a particular mortgage.
Your approval odds will be higher if you have a DTI ratio below 36%. 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.[5] If not, you may
need to look to other “non-conforming” loan types, such as government-backed
mortgages.
Lenders may also take into account other
expenses unique to a home, such as property taxes, insurance, and homeowner
association fees. In general, they prefer that you spend less than 28% of your
income on housing or a maximum of 36% (which is the cap that
federally-sponsored lenders advise).[6]
3. Your Expected Down Payment
You don't have to put down 20% to qualify for
a conventional mortgage, but you will need a significant amount. According to
the National Association of Realtors, the median down payment amount in 2023
was 14%.[7] If your cash reserves are slim, then you may want to consider an
FHA loan, which only requires 3.5% down. Or, if you qualify for a USDA or VA
loan, you may even be able to buy your home with no money down except for a
small funding fee.[8]
Keep in mind, though, that a smaller down
payment could mean a larger monthly payment. Plus, you'll not only pay more
interest overall and be responsible for a larger principal, you'll also need to
take out mortgage insurance. Conventional loans require private mortgage
insurance (PMI) if your down payment is below 20%, while FHA loans always
require insurance.[9]
4. Your Lifestyle and Risk Tolerance
For most Americans, a mortgage is a
decades-long commitment. So it's important to find one you can happily live
with—and comfortably repay—for the long haul. Most fixed rate mortgages, for
example, are designed to last anywhere from 15 to 30 years or more.[10] When
you spread out your repayment over such a long period, monthly payment amounts
are smaller, but you also pay more in interest.
Another way to lower your monthly payment in
the short term is to choose an adjustable-rate mortgage (ARM) that offers a low
fixed APR for a lengthy period (typically five, seven, or 10 years) before
changing to a variable rate. This can be especially beneficial if you only plan
to stay in the home for a short period. But buyer beware: ARMs can be risky if
you don't plan ahead for a higher interest rate.[11]
BOTTOMLINE
Regardless of the loan you choose, it pays to
shop around and carefully compare terms. Fortunately, we have a vetted list of
mortgage professionals 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:
1.
Bankrate
2.
Bankrate
3.
Newsweek
4.
NerdWallet
5.
Bankrate
6.
Bloomberg
7.
National Association of Realtors
8.
Bankrate
9.
CFPB
10.
Investopedia
11.
NerdWallet