The No. 1 Mortgage Fear May Surprise You
Buying a home can be scary. For most of us, the homes we buy are the largest purchases we ever make. For those who have tried to owe as little as possible in life, paying off student loans quickly and avoiding credit card debt, it can be unsettling to suddenly owe more than a hundred thousand dollars -- and very possibly hundreds of thousands of dollars.
Surveys have explored Americans' greatest fears when it comes to mortgages and homebuying. Here's a review of two top fears -- see if they are (or have been) your fears, too.
Image source: Getty Images.
Fear of having your mortgage application rejected
A 2014 surveyconducted for online mortgage company loanDepot foundthat the top fear for would-be homebuyers was that they wouldn't be able to get a mortgage. It was cited by 54% of overall respondents and 56% of those who were looking to buy their first home. This fear is dangerous because it can keep otherwise qualified borrowers from even trying to get pre-approvedfor a mortgage.
It's true that lenders became more demanding after the financial crisis, but most applications are still approved. In fact, according to a recentNerdWallet.com report, 89% of mortgage applicants had been approved for a home loan. Still, rejections do happen. Here's what can increase the chances of your loan application being approved:
- A sizable down payment: If you're paying 20% or more down when you buy a home, lenders may have more confidence in you as a borrower -- and more importantly, they'll have collateral in the event that you default.You'll also have more equity immediately -- more skin in the game. Furthermore, if you pay less than 20%, you'll likely need to buy private mortgage insurance, which will increase your costs.
- Sufficient income: You might think that having a lot of assets and a fat savings or brokerage account will impress a lender, but lenders are generally much more interested in your income.They want to see income -- ideally relatively consistent income -- as it reflects a borrower likely to be able to make mortgage payments month after month. For best results, your total expected housing costs -- mortgage, insurance, and taxes -- should total no more than about a thirdof your monthly income. Image source: Getty Images.
- A high credit score: If your credit score is low, it suggests that you're not a good bet for a mortgage -- that you're likely to be late with payments or find it hard to make payments. With commonly used FICO scores, for example, which range from 300 to 850, a very good score would be 740 or higher, and 800 or higher is excellent.
- A manageable debt-to-income ratio: Lenders won't like it if you already have a lot of debt and are looking to add to that. It will seem less easy for you to make monthly mortgage payments when you're already saddled with other significant monthly loan repayments. For most loans, lenders want your debt-to-income ratio to be no more than 43%.
- Being married: You're more likely to be approved for a loan if there are two of you. After all, that does mean two incomes, and less of a chance that one job loss or one income reduction will lead to a default on mortgage payments. The NerdWallet report found approvals more likely for married applicants (92%) than for unmarried ones (84%).
Applying for a mortgage means supplying your lender with lots of documents, including bank and brokerage statements, along with your tax return, verification of employment, and so on. For smoother sailing, avoid making any big financial moves while applying for a loan, so as not to raise any new questions or worries. If possible, for example, don't change jobs, take on any other debt, get a new credit card, cancel a current credit card account, or make a big purchase.
Image source: Getty Images.
Fear of ending up with an overwhelming monthly payment
A 2010 surveyby the Home Buying Institute came up with a different top fear -- that of buying a home and ending up with a too-steep monthly mortgage payment. That fear was cited by 36% of respondents, with the next biggest fear being that of paying more for the home than it's worth (cited by 23%).
An unmanageably large monthly mortgage payment is a reasonable worry, but only to a point. After all, you can control the kind of payment you set yourself up for.
For starters,how much house you buy matters. The more costly your purchase, the bigger your payment will be, all things being equal. Then there's the length of your loan: A 30-year fixed-rate mortgage will give you significantly lower monthly payments than a 15-year loan -- though it will cost you more overall, because you're paying more interest. Check out the examples below.
|
Home Price |
Loan Amount |
15-Year Monthly Payment at 4% |
30-Year Monthly Payment at 4.5% |
|---|---|---|---|
|
$200,000 |
$160,000 |
$1,184 |
$811 |
|
$300,000 |
$240,000 |
$1,775 |
$1,216 |
|
$400,000 |
$320,000 |
$2,367 |
$1,621 |
|
$500,000 |
$400,000 |
$2,959 |
$2,027 |
|
$750,000 |
$600,000 |
$4,438 |
$3,040 |
|
$1 million |
$800,000 |
$5,918 |
$4,053 |
Source: Bankrate.com online calculator.
Finally, the lower the interest rate on your loan, the lower your payments will be. Yes, interest rates have begun rising, but they're still low, historically speaking. A high credit score will get you lower rates from your lender. The table below shows just how much of a difference that can make, reflecting recent interest rates for someone borrowing $200,000 via a 30-year fixed-rate mortgage. If your score is poor, it can be worth spending some time beefing it up, such as by correcting any errors on your credit record, paying bills on time for a while, and paying down debts. Be sure to shop around and compare mortgage rates when you're house-hunting, too, as lenders' rates can vary widely.
|
FICO Score |
APR |
Monthly Payment |
Total Interest Paid |
|---|---|---|---|
|
760-850 |
3.856% |
$938 |
$137,789 |
|
700-759 |
4.078% |
$964 |
$146,985 |
|
680-699 |
4.255% |
$984 |
$154,408 |
|
660-679 |
4.469% |
$1,010 |
$163,488 |
|
640-659 |
4.899% |
$1,061 |
$182,079 |
|
620-639 |
5.445% |
$1,129 |
$206,237 |
Source: MyFICO.com,as of late March 2017.
It's natural to be a little anxious as you go through the homebuying process, but remember that you will very likely have your mortgage approved, especially if you position yourself well, and your monthly payments are largely under your control.
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