Who wouldn't be anxious about making a huge down payment, having their finances investigated by a lender, and ultimately committing to paying off what they owe month after month?
But guess what? Many people's fears about mortgages are largely unfounded. To prove it, we're here to take a closer look at the things that scare homebuyers. So if one of these fears is stopping you, here's a dose of reality: they're actually not as nerve-wracking as their bad reputations might suggest.
Fear No 1: Not having enough money for a down payment
Keith Gumbinger, vice president of mortgage research site HSH.com, says that being able to come up with a down payment is often a homebuyer's biggest fear. But that's mostly because many homebuyers think they absolutely need a 20 percent down payment to get approved for a mortgage, which isn't the case.
Of course, there are benefits to making an extra down payment. If you're getting a conventional loan, a 20 percent down payment allows you to avoid paying private mortgage insurance (PMI), which is about 0.3 to 1.15 percent of your home loan, depending on your loan amount, credit score and loan term. However, the prospect of paying for private mortgage insurance shouldn't completely dissuade you from buying a home, says Ray Rodriguez, regional mortgage sales manager at TD Bank.
"There is a stigma about needing to pay for mortgage insurance, but it can help you afford a home," Rodriguez says. Additionally, paying for mortgage insurance is about getting a home loan now rather than buying a home in a few years, which allows you to take advantage of current low interest rates.
Still, there are ways to avoid paying PMI. If you've served in the military, one way is to get a VA loan, which requires no PMI. another worthwhile way is to qualify for a down payment assistance; there are thousands of down payment assistance programs across the country that provide financial assistance. (You can find programs in your area on the National Council of State Housing Agencies' website, as well as on the Down Payment Resources website.)
Fear No 2: Not qualifying due to poor credit
When you apply for a mortgage, the lender will check your credit score. Ideally, your credit score should be on the higher end of the 760 to 850 range, because it's in this range that you'll qualify for the best interest rate. (If so, congratulations!) .
However, most lenders will still approve borrowers with a credit score of at least 650 for a conventional loan. (If your score is lower than that, you may need to spend a few months repairing your credit before applying for a mortgage.)
At the same time, there are mortgages with less stringent credit requirements. VA loans for military personnel and veterans typically require only a 620 credit score; Federal Housing Administration loans require only a 580 credit score. (Of course, there are other requirements you'll need to meet to qualify for these loans).
You should also keep in mind that credit is only one factor in the strength of your loan application, Gumbinger says. In fact, "for most homebuyers, your credit score will determine whether you get a favorable interest rate," Gumbinger says, "not whether you qualify for a loan."
Fear No. 3: Not Making Monthly Mortgage Payments
Foreclosures are becoming more common, and given the possibility of unexpected layoffs, homebuyers' fears are not without merit, says Staci Titsworth, Pittsburgh area manager for PNC Mortgage, adding that the best way to create a safety net is to build a solid emergency fund before purchasing a home.
Titsworth suggests building an emergency fund to cover at least six months of living expenses, including the monthly mortgage payment you may need to make. (You can use a mortgage calculator to estimate your mortgage payment).
With a sufficient emergency fund, you will be able to continue paying your mortgage even if you are unemployed for a few months.
Fear No 4: Getting into too much debt
Being in debt doesn't automatically mean you won't qualify for a mortgage, Rodriguez says.
What mortgage lenders care about is your debt-to-income ratio, or DTI, which is the amount you owe (student loans, credit cards, auto loans, etc.) to your income. For conventional loans, most lenders require borrowers to have a DTI of no more than 36% (but some lenders accept up to 43%).
For example, if you make $6,000 a month but spend $500 a month on student loan debt, you divide $500 by $6,000 to get a DTI of 8.3%, and then add in the amount you pay each month on your home loan.
If your DTI is over the 36% cap, there are ways you can lower your DTI. the easiest way is to apply for a smaller mortgage, which means you'll have to lower your price range. However, even a smaller home is better than nothing.
