Credit score or down payment? What Leads To An Affordable Mortgage?

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Buy a new home involves many decisions for both buyers and lenders – and it all starts with financing.

Your primary goal when buying a home should be to secure a mortgage with low interest rates and a monthly payment that fits your budget. budget. To make things easier, experts recommend clean up your credit report and increase your credit score before you apply for a mortgage and save for a large down payment.

But the amount of your down payment is not always clear. Traditionally, homebuyers have heard that they should be able to save 20% less, but depending on where you live and what type of mortgage you get, you might not need to. as much.

Yet there is still a major reason why experts recommend putting 20% ​​less every time you take out a conventional mortgage, according to Motion mortgage loan officer Heidi Gage. This amount is the minimum required to avoid paying private mortgage insurance (PMI) – an additional premium that is added to your monthly mortgage to protect the lending company in the event of default.

Below, we spoke with Gage to find out why you should consider making a larger down payment in addition to improving your credit rating before you apply for a mortgage. Pawn also explains how mortgage lenders make their decisions so you know how much you should be saving when considering buying a home.

Why the down payment matters as much as your credit score

A 20% down payment saves you from paying the PMI on a conventional mortgage.

the Consumer Financial Protection Bureau (CFPB) warns that PMI is meant to protect the lender – not the buyer. From a lending standpoint, a buyer who does not invest 20% in their home incurs more liability on the mortgage company since they are borrowing more money.

And unlike your mortgage bill, your monthly PMI payment is never used to pay off the cost of your home. This means that you will be paying more money each month, but it will not come close to paying off your house.

Another useful reason to save for a larger down payment is to influence the amount of your mortgage: “In essence, a larger down payment can allow you to buy a home at a higher price.” explains Gage. CNBC Select.

The more equity you have in a home, the lower the risk of default. This lower risk can then translate into a more advantageous rate for the borrower.

How lenders decide who gets a mortgage

Gage explains that there are four main factors mortgage lenders consider when applying for a home loan – she calls them the “four Cs”.

These are 1) credit history and score; 2) guarantee (type of property to be guaranteed); 3) cash (your down payment) and 4) capacity (how much debt you have to income each month).

“Insurers look at the loan against the above criteria, as well as the risk factors on top of it,” Gage explains. If you have low capacity (that is, your debt is high and your income is too low), you may be turned down for a mortgage if you don’t have enough down payment. And on the flip side, a risky debt-to-income ratio can be overcome if a borrower has a lot of money in the bank and a stellar credit history, Gage says.

“That’s why it’s essential to be pre-approved before going home shopping,” advises Gage. “An experienced loan officer will review credit with a potential borrower and can often provide them with a ‘roadmap’ to better credit through tools available to the loan officer.

For example, Movement Mortgage loan officers can help buyers improve their scores, including a “what if” credit simulator that shows borrowers what steps they can take to improve their scores. credit rating in order to get the most affordable rates (like paying off credit cards and loans, establishing new credit, etc.)

And if you have been put money in savings, Gage recommends reserving some of your money in a emergency fund separate from your down payment. Mortgage underwriters call this money your “stash” and they prefer to see that you have enough to cover home repairs, property taxes, home insurance and unforeseen emergencies well beyond the closing date.

“How much a borrower keeps in reserve versus how much he puts in is something he has to decide as an individual based on his budget and personal comfort level,” Gage explains.

What to do if you can’t put 20% down

Making a 20% down payment follows conventional wisdom, but in many markets there are flexible mortgage options that require as little as 3% down payment, Gage explains.

Traditional mortgage products offer lower down payment loans, as well as special programs for first-time buyers. Some examples are VA and USDA loans (up to 100% financing), FHA offers (requires 3.5% down payment), and Fannie Mae and Freddie Mac (as little as 3% down payment). As a buyer, you should discuss the pros and cons of each with your lender.

Indeed, the average first-time buyer in 2019 only put a 6% discount on his home, financing 94% of the purchase price. This is compared to the average down payment of regular buyers of 16%, according to the latest data from the National Association of Real Estate Agents (NAR)

“More often than not, buyers put 20% off the purchase of a subsequent home using the equity from the sale of another property,” says Gage.

Last year, 38% of homebuyers said they used the proceeds from the sale of a primary residence to secure a down payment on their next home.

At the end of the line

“The closer a borrower is to a 20% drop, the lower their monthly payments will be,” says Gage.

A large down payment is factored into your borrower profile when you apply for a mortgage, along with your credit history, collateral, and current debt level.

While 20% seems intimidating, as it does for many first-time homebuyers, there are options for buying a home with less upfront money. If buying real estate is important to you and your financial plan, consider whether it is worth paying a monthly premium for PMI.

As you prepare to apply for a mortgage, contact qualified loan officers and seek help building your mortgage. credit rating and improve your chances of approval.

Don’t miss: What credit rating is required to buy a home?

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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