February 20th, 2017 7:07 AM by Jackie A. Graves
Worried about applying for a mortgage? These
tips will help you stress less.
A mortgage is a serious undertaking, so it's natural to have
certain concerns about the process. Here are four common mortgage-related fears
-- and what you can do to alleviate them.
While many lenders do require a 20% down payment, some will let
you get away with putting down significantly less. In fact, many buyers put
down a mere 5% to 10% and still get their loans approved.
Now the caveat is that if you fail to make a 20% down payment,
you'll likely get hit with private mortgage insurance, or PMI, which will
add to your monthly housing costs. PMI typically equals 0.5% to 1% of your
loan's value, so if you take out a $250,000 mortgage with a 1% PMI premium,
you'll pay an extra $2,500 a year.
Furthermore, FHA loans (mortgages insured by the Federal Housing
Administration) require as little as 3.5% down. You'll need a decent credit
score, however, to qualify for such a small down payment. There are also VA and
USDA loans, which, if you qualify, require no money down at all.
If you're looking to buy a home and don't have much to put down,
you can overcome that barrier by working on your credit so that lenders see you
as a desirable loan candidate. Of course, the more money you put down for your
home, the lower your mortgage payment will be, but if you have a steady job and
decent cash flow, a lower down payment won't hurt you as much.
Lenders aren't as quick to give out mortgages these days as they
were 10 years ago (which is actually a good thing for borrowers who might
otherwise get in over their heads). But while it's true that a low credit score
can hurt your chances of getting approved, you don't need the highest score,
either. To become eligible for an FHA loan, for example, you'll need a FICO
score of 500. Furthermore, if your score is 580 or higher, you'll be eligible
for just a 3.5% down payment. If your score is between 500 and 579, you're
still likely to get approved, albeit with a 10% down payment requirement.
Additionally, you should be aware that Fannie Mae and Freddie Mac
typically impose a minimum credit score of 620. But given that the average
credit score in the U.S. is currently at an all-time high of 695, it's a
relatively achievable target.
If your credit score isn't where you need it to be, you can take
steps to boost it. First, review your credit report for errors. An estimated
20% of credit reports contain mistakes, and a glaring one could hurt you. Next,
work on paying off high-interest debt and lowering your credit utilization
ratio, which is the extent to which you're using your available credit. If you
have three credit cards with a collective limit of $10,000 and you're carrying
a $4,000 balance, you'll have a 40% credit utilization score. Most lenders want
this number to be 30% or lower, so if you can knock out some existing debt,
you'll increase your chances of getting approved.
It's true that buying a home is typically a longer-term commitment
than renting one. And while you may have the option to break free from a lease
if your job situation goes sour, getting out of your mortgage payments is a
whole different story. But if you go into the homebuying process with adequate
emergency savings, you're less likely to lose your home even if you do go a few
months without income.
Most people are advised to save enough money to cover three to six
months of expenses. If you're buying a home, however, you should definitely aim
for the high end of that range. Or, to be extra safe, sock away nine months of
living expenses before you jump in. The more you save, the more time you'll buy
yourself to get back on your feet without losing your home in the process.
Though renters don't get any equity in exchange for their monthly
payments, they also don't have to take on the risks associated with
homeownership, from rising property taxes to major repairs. That said, owning
isn't necessarily costlier than renting. In fact, according to
GoBankingRates.com, owning a home is cheaper than renting in 42 out of 50
Additionally, homeowners are eligible for certain tax breaks that
aren't available to renters. When you own a home, you can deduct expenses like
mortgage interest and property taxes, and if you work out of your house, you
might also be eligible for a home office deduction. All of these deductions can
lower your tax burden and put more money back in your pocket.
Getting a mortgage is a big step. The more prepared you are going
into the process, the better your chances of getting approved and managing your
finances as a new homeowner.
By Maurie Backman - To view the original article click here