by Daniel Bortz | reprinted from Realtor.com
Let's get real, shall we? Getting a mortgage can be a little frightening. Heck, a lot. Who doesn't get jittery at the prospect of coughing up a huge down payment, of letting lenders probe their financial past, and of ultimately committing to paying back what's owed, month after month, regardless of what curveballs life might throw? In fact, according to a survey by Loan Depot, 46% of potential home buyers fear they won't qualify for a mortgage to the point that they don't even try.
But guess what? Many of people's mortgage fears are largely unfounded. As proof, here's a closer look at the top things that give home buyers the heebie-jeebies. So, if one of these fears is stopping you, here's a quick reality check: They aren't actually as nerve-wracking as their bad rap suggests.
Fear No. 1: Not having enough money for a down payment
Being able to assemble a down payment is often the most daunting concern among home buyers, says Keith Gumbinger, vice president of mortgage research site HSH.com. But that’s largely because a lot of home buyers think they absolutely need to fork over a 20% down payment to get approved for a mortgage, which isn’t the case.
There is, of course, a benefit to putting more money down. If you’re getting a conventional loan, a 20% down payment enables you to avoid paying private mortgage insurance, or PMI, which can range from about 0.3% to 1.15% of your home loan depending on your loan size, credit score, and length of the loan. However, the prospect of paying PMI shouldn’t completely dissuade you from buying a home, says Ray Rodriguez, regional mortgage sales manager at TD Bank.
“There’s a stigma about needing to pay mortgage insurance, but it can help you afford to purchase a home,” says Rodriguez. Also, paying PMI in order to get a home loan today—instead of buying a few years from now—can enable you to take advantage of the 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 option worth pursuing is qualifying for down payment assistance; there are 2,290 down payment assistance programs across the country that offer financial assistance, kicking in an average of $17,766, according to one study. (You can find programs in your area on the National Council of State Housing Agencies website, or at the Down Payment Resource.)
Fear No. 2: Not qualifying due to poor credit
Lenders will check your credit score when you apply for a mortgage. Ideally, you’re on the higher end of the credit spectrum—anywhere between 760 and 850—since being in that range will enable you to qualify for the best interest rates. (If so, congrats!) But most lenders will still approve conventional loans for borrowers who have credit scores of at least 650. (If your score is below that, you might need to spend a few months repairing your credit before you apply for a mortgage.)
Meanwhile, there are some mortgages that have less strict credit requirements. A VA loan, for military service members and veterans, typically requires a credit score of only 620; and a Federal Housing Administration loan requires a credit score of only 580. (Granted, you’ll need to meet other requirements to qualify for one of these loans.)
You should also bear in mind that credit is just one factor that affects the strength of your loan application, says Gumbinger. In fact, “for most home buyers, your credit score is going to determine whether you’re able to get a great interest rate," says Gumbinger, “not whether you qualify for a loan.”
Fear No. 3: Not being able to make monthly mortgage payments
Although foreclosures dropped to a 10-year low last year, foreclosure is still a valid concern for home buyers—given the potential for an unexpected layoff. The best way to create a safety net is to build a solid emergency fund before you purchase a house, says Staci Titsworth, regional manager of PNC Mortgage in Pittsburgh.
Titsworth recommends building an emergency fund that will cover living expenses for at least six months; that includes your potential monthly mortgage payments. (You can use realtor.com®’s mortgage calculator to get an estimate of what your mortgage payments will be.) By having a sufficient rainy day fund available, you’ll be able to continue making mortgage payments if you become unemployed for a few months.
Fear No. 4: Getting in too much debt
Today, the average household with credit card debt has balances totaling $16,748, a recent NerdWallet study found. Meanwhile, student debt has surged to an average $28,950 per borrower, according to the Institute for College Access & Success. However, having debt doesn’t automatically mean you won’t be able to qualify for a mortgage, says Rodriguez.
What mortgage lenders care about is your debt-to-income ratio, or DTI, which compares how much money you owe (on student loans, credit cards, car loans, and more) to your income. For a conventional loan, most mortgage lenders require a borrower’s DTI to be no more than 36% (although some lenders will accept up to 43%). For example, if you make $6,000 a month but spend $500 a month paying off student loan debt, you divide $500 by $6,000 to get a DTI of 8.3%—then you add how much money you would pay each month for a home loan.
If you’re above the 36% ceiling, there are ways that you can lower your DTI. The easiest would be to apply for a smaller mortgage—meaning you’ll have to lower your price range. But hey, even a smaller house might be better than none at all.
Daniel Bortz is a Realtor in Maryland, Virginia, and Washington, DC, who has written for Money magazine, Entrepreneur magazine, CNNMoney, and more.
