Securing a mortgage can seem challenging, especially with home prices and interest rates remaining relatively high. However, don't let that discourage you. Many homebuyers have successfully navigated these conditions and found a mortgage that suits their needs. In fact, a recent Bankrate survey found that most U.S. homeowners are satisfied with their mortgages, with 69% saying they'd buy their current home again if given the chance [1].
Finding the right home loan is all about ensuring you’ll be comfortable with it long after closing. Beyond comparing term lengths and mortgage rates, consider how the loan aligns with your daily life and preferences.
Ask yourself important questions: Are you comfortable with risk, or do you prefer stability? Can you manage a higher mortgage payment if interest rates rise, or are your anticipated home expenses already at your budget’s limit?
To assist you, here are four critical factors to consider when selecting a mortgage:
1. Your Credit Score
Your credit score significantly influences your interest rate and the type of mortgage available to you. A FICO score of at least 620 is typically required for a conventional mortgage from major banks or credit unions. However, some loans demand higher scores [2]. For example, a USDA loan for rural properties requires a minimum FICO score of 640, and jumbo mortgages often require a score of at least 700 [2].
If your credit score is lower, there are still options. FHA loans may be available with a score of 580 and a 3.5% down payment. VA loans, for military service members and their families, may be accessible with little to no down payment and a credit score in the 580 to 620 range [2,3]. Some regional banks and credit unions might also be more flexible with credit requirements [4]. Improving your credit score can save you interest and potentially allow you to afford a more desirable home.
2. Your Income and Expenses
Your income and expenses are crucial in determining your mortgage options. Lenders generally prefer that no more than 28% of your income goes towards housing, with a maximum of 36% being ideal [5]. This is assessed through your debt-to-income (DTI) ratio, which is a key factor in mortgage approval. A DTI ratio below 36% improves your chances, but some loans may still be available with a higher ratio if you have excellent credit and significant savings [6,7].
3. Your Expected Down Payment
The size of your down payment impacts the type of mortgage you can get. While a 20% down payment is not mandatory for conventional loans, the median down payment in 2023 was 14%, with younger buyers typically putting down 8% [9]. Larger down payments can sometimes help secure loans that might be otherwise difficult to obtain. FHA loans require only a 3.5% down payment, while USDA and VA loans might allow you to purchase a home with no down payment at all [11]. Keep in mind that smaller down payments often lead to higher monthly payments and the necessity of mortgage insurance [12].
4. Your Lifestyle and Risk Tolerance
Your lifestyle and risk tolerance are essential when choosing a mortgage. Most Americans commit to their mortgages for decades, so it's vital to select one that fits your long-term plans. Fixed-rate mortgages, typically lasting 15 to 30 years, offer stability with smaller monthly payments but result in higher total interest payments [14]. Shorter-term mortgages save on interest but require higher monthly payments [15]. Alternatively, adjustable-rate mortgages (ARMs) provide a low fixed rate for an initial period before adjusting to a variable rate, which can be advantageous if you plan to sell the home within a few years but risky if rates increase [16,17].
Bottom Line
Shopping around and comparing terms is crucial when choosing a mortgage. Many homebuyers miss out on savings by sticking with the first lender they meet [18]. Fortunately, we offer a vetted list of mortgage professionals who can explain your options, answer your questions, and help you find the best loan for your needs. We can also create a custom plan to secure a great home that fits your budget. Reach out when you’re ready to get started.
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
- Bankrate - https://www.bankrate.com/mortgages/home-affordability-report/
- Bankrate - https://www.bankrate.com/real-estate/what-credit-score-do-you-need-to-buy-a-house/
- U.S. News & World Report - https://money.usnews.com/loans/mortgages/va-loans
- Newsweek - https://www.newsweek.com/vault/mortgages/bank-vs-credit-union-for-mortgages/
- Bloomberg - https://www.bloomberg.com/news/articles/2024-05-17/how-much-income-do-you-spend-budget-for-home-mortgage-in-us
- NerdWallet - https://www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage
- Bankrate - https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/
- Bankrate - https://www.bankrate.com/mortgages/how-interest-rates-are-set/
- National Association of Realtors - https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf
- Bankrate - https://www.bankrate.com/mortgages/self-employed-how-to-get-a-mortgage/
- Bankrate - https://www.bankrate.com/mortgages/no-down-payment-mortgage/
- CFPB - https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
- Bankrate - https://www.bankrate.com/mortgages/basics-of-private-mortgage-insurance-pmi/
- MPA Magazine - https://www.mpamag.com/us/mortgage-industry/guides/the-7-most-popular-types-of-mortgage-loans-for-home-buyers/255499
- Investopedia - https://www.investopedia.com/articles/personal-finance/042015/comparison-30year-vs-15year-mortgage.asp
- NerdWallet - https://www.nerdwallet.com/article/mortgages/adjustable-rate-mortgage-arm
- Federal Reserve Bank of St. Louis - https://www.stlouisfed.org/on-the-economy/2024/feb/which-households-prefer-arms-fixed-rate-mortgages
- LendingTree - https://www.lendingtree.com/home/mortgage/shopping-around-survey/