You’ve got a great job, you’ve been at your job for a few years, you’re making good money and can verify your salary, and you have little debt with a high credit score. Sorry, that’s still not enough to qualify you for a home mortgage.
Lenders are still smarting from the real estate crash and millions of foreclosures that occurred during the last housing meltdown that began in 2008 when we hit the recession, so all that easy money that gave your parents quick access to a home loan is gone.
Today, you’ll need to put down enough of a cash down payment that lenders will recover their money if you eventually default on your loan. And, while many millennials aren’t able to buy a house for a number of reasons, they’re still hoping to one day. That’s why we breakdown just how much it takes for a down payment to make it happen.
At the low end, you might qualify for home loan from the U.S. Federal Housing Administration, meaning you’ll only need a 3.5 percent down payment. In order for that to happen, you’ll need excellent credit and a verifiable job. Your total monthly payments (including the mortgage payment, insurance and taxes) can’t exceed more than 36 percent of your income. If you’re buying a condo, you’ll have to add your association fees to that number.
A down payment loan from commercial lenders are higher, though, and condo down payments are usually higher than down payments on homes. Commercial lender down payment amounts are often 20 percent of the price of the house.
For some military veterans, special mortgage rates provided by the U.S. Department of Veterans Affairs and credit unions could be available, too. Another option is a mortgage from a credit union, and, remember the lower the down payment, the higher your monthly payments will be and the more interest you’ll pay over the life of your loan.
During the Clinton administration, Congress loosened home lending laws so that people with good credit, but little cash, could buy homes. This wasn’t done just to help the little people — it propelled the greatest housing boom in the country’s history. Unfortunately, not only was it easier for people to qualify to buy a house or condo (with little or no cash down payment), it also became easier to confuse borrowers with new financial products like Adjustable Rate Mortgages. ARMs seemed to feature a small increase (percentage wise) in monthly payments after three years, but the actual dollar amounts were so large many homeowners couldn’t make the payments.
Complicating matters more were the “robo-signing” of mortgage applications (which included false incomes stated on the applications), which was another factor in housing market eventually bursting. And burst it did. Today, homebuyers need better credit and more cash to buy a house or condo.
Your credit score affects your mortgage situation in two ways. First, the higher your credit score, the more likely it is you’ll get a mortgage (assuming you’re employed and have a down payment). Your credit score also affects the interest rate that you’ll receive. Just a .25 percent increase in your mortgage interest rate can add tens of thousands of dollars to the cost of buying your home over the life of the mortgage.
If you’re right on the bubble of very good and excellent credit, you might not need to do much to improve your credit score enough to make the difference.
The best way to go about checking out mortgage scenarios is to talk to a professional who knows what he or she is talking about. Visit your local bank and ask to speak to a mortgage lender. That person can take you through the steps of getting a mortgage. After this meeting, you’ll know what documents you’ll need to submit, what your credit score should be, how much you’ll need to put down based on the house you want or how much house you can afford based on how much of a down payment you have. The mortgage lender will also be able to discuss the differences between an ARM, 30-year fixed and 15-year-fixed mortgage and what your monthly payments would be.
If you already have a mortgage and are thinking of buying a new home, your banker can tell you how much equity you have in your home, and whether or not you can use that equity for your down payment. Also ask about FHA loans while you’re there. FHA loans are government-sponsored loans that usually feature lower down payment amounts and accept slightly lower credit scores. Once you have all of this information, you can then start shopping online or over the phone for competitive mortgages.
If you want a rough estimated of how much money you’ll need for a down payment based on a particular price range, use an online mortgage calculator tool. The tool will ask you to enter information such as the price of your house, your credit score and your geographic location. It will then project your down payment and monthly payments.
Some online tools let you request multiple loan bids from lenders with a touch of a button. However, if all of these lenders do a hard pull of your credit reports, your score might drop enough to disqualify you from getting a loan, or affect the interest rate you get. So make sure to educate yourself and figure out the right lender for you before just applying with a bunch of different ones.
Lead image via Getty
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