Would you like to buy a home but worry you’d never qualify for a mortgage? Maybe you’re afraid that you don’t make enough money or have enough cash for a down payment. Maybe you think your credit score is too low and your debt too high. Mortgage fears can hold you back from buying with confidence.
7 Home Buyer Fears and Why Not to Worry
1. I don’t have enough money for a down payment.
The average down payment for conventional loans is 19%, 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 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.
2. I have too much debt.
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 below the average debt-to-income ratio of 36% for conventional loans. Can’t quite make the cut? The average debt-to-income ratio rises to 42% for VA loans and 44% for FHA financing.
3. I don’t make 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.
According to Ellie Mae, housing costs average 24% of income for conventional loans, 29% for FHA loans and 26% 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.
The key is to stop wondering about this stuff. Put your income and debts into this mortgage calculator to get a good idea of how much you can borrow.
4. My credit score is too low.
The average FICO credit score for a conventional loan is 753, according to Ellie Mae. That falls to 708 for VA loans and a much lower 673 for FHA financing. You could be among the 3 out of 4 consumers with a credit score below 700 and qualify for a mortgage, and that doesn’t need to hold you back.
5. I’d feel horrible if I went through the entire home-buying process only to get turned down for a loan.
You can get a very good idea of where you stand before you ever go home shopping by asking a bank or mortgage company to review your finances and pre-approve you for a mortgage. The pre-approval process is usually free, and if you pass muster, you’ll get a letter stating the maximum amount that lender is willing to provide.
Not only will that boost your confidence, 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.
Pre-approval 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.
6. Even if I get a loan, I’ll get stuck with a terrible interest rate.
Mortgage rates 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 purchase and refinancing) is 4.62%.
That hits 4.70% for FHA financing and 4.41% for VA loans. Search Bankrate’s extensive database of the best mortgage rates from dozens of local lenders to see how cheap loans still are in your area.
For most borrowers, the best deal is the one that offers the lowest interest rate and lender fees of $2,000 or less.
7. Buying a home costs more than renting, and I can barely afford to rent.
A recent analysis by Realtor.com found the monthly costs of buying a home are cheaper than renting in 20% of counties with populations over 100,000. While home prices may be climbing, cost of rent is increasing just as quickly.
You don’t have to guess what’s best for you. This rent versus buy calculator will determine what makes the most financial sense.