Tips for Finding an Affordable Home
Buying a home doesn’t have to be stressful. These tips will help to get you started:
#1: Get To Know Your Debt-to-Income Ratio
Most mortgage lenders will only approve your application if they know you can afford the payments. Part of what they consider is your debt-to-income ratio, (DTI). That's the amount you pay every month toward your debts divided by your monthly income before taxes.
In most cases, you need a DTI of no more than 57% to get a mortgage, but qualifying for a loan at that ratio could be difficult. If your DTI is lower, you’re more likely to get a lower rate. Keep in mind that your hypothetical mortgage payment will be a factor when determining your DTI, so use that in your calculation.
Before you begin paying off debt to lower you DTI, check in with a loan advisor on our team. We'll look at your full financial situation and decide if paying off debt is your best choice.
#2: Get Pre-Approved
Pre-approval is a great bargaining chip when it comes to making an offer on a home. It’s also your benchmark for what you qualify for when home shopping. A pre-approval letter is great for you. It shows how much a lender is willing to lend you.
But don't confuse a pre-approval amount for what you can afford. The amount your pre-approved for is based loosely on your basic monthly expenses, but doesn't include any non-bill spending—like food, gas or shopping. Use your pre-approval as a hard spending limit, but try to set your price range lower. Assess your expenses and set a budget that feels comfortable to you.
#3: Research First-Time Homebuyer Programs
There are lots of lending programs out there that exist specifically to remove barriers to homeownership for first-time homebuyers. Start your research here, as this is the only time in your life as a homeowner that you’ll qualify for these programs.
At the federal level, the option designed specifically for first-time buyers is the Standard 97% Loan-to-Value Mortgage, or 97 LTV, by FannieMae. It lets you put as little as 3% down on a home if at least one borrower is a first-time buyer (among other requirements).
States also sponsor programs that help first-time homebuyers with down payments and closing costs. Many of these programs match the buyer with lenders that offer competitive interest rates, and some even give tax credits for further savings. Check out what’s available in your state (or the state you want to move to).
#4: Consider An FHA Loan
An FHA loan is a mortgage that's backed by the Federal Housing Administration (FHA) and requires as little as a 3.5% down payment. With an FHA loan, the government guarantees a portion of the loan amount—allowing those with lower credit scores or financial standings the chance to buy a home.
#5: Focus on Your Credit
If your credit score is above 740, you’re in great shape. While a conventional loan may require a credit score of 620 or above, FHA loans have traditionally accepted scores in the 500s. (However, many lenders at the time of this writing require a 640 or higher.)
Here at Lower, one of the first things we'll do is walk with you through your credit report. If needed, we're happy to show you how to improve your score and meet your home goals.
#6: Consider Making a Higher Down Payment
You don’t need to put 20% down to get a mortgage, but you can often get a lower interest rate if you put more down.
The other benefit to saving up for a higher down payment is that if you put down 20% or more of the home’s value, you don’t have to pay for private mortgage insurance (PMI). PMI will be an addition to your monthly payment, and depending on your loan type, you could end up paying PMI for many years.
#7: Ask Questions
Your mortgage is possibly the biggest loan you’ll ever take out. It’s important to read the fine print and understand all of the terms and fees you're agreeing to when you sign. A transparent and trustworthy lender will welcome any questions you might have. (Hi, we're Lower.)
In Summary
When thinking about buying your first home, the best place to start is getting pre-approved. If you're ready, we're here to help. Here at Lower, we don't use a hard credit pull until you're ready to buy. (And we'll always ask.) So you can speak with a loan advisor and discuss your options without having an impact on your credit. Let's do this!
