Financing

Top 4 Factors to Consider When Choosing Your Mortgage

 

With home prices and rates still relatively high, securing a mortgage can feel daunting––even to the most experienced borrowers.

But don’t let that deter you: If other homebuyers’ experiences are any indication, odds are you’ll eventually find a home loan that works well for you.

In fact, most U.S. homeowners say they’re satisfied with the mortgage they received, according to a recent Bankrate survey.

The vast majority of the surveyed homeowners (69%) said they’d buy their current home again if they had a do-over.1

The key to finding the right home loan for you is to look for one that you’ll feel comfortable with long after you’ve closed on your new property.

In addition to comparing term lengths and mortgage rates, also consider how the loan will fit your daily life and preferences.

For example, we recommend asking yourself questions such as: Are you a natural risk taker, or do you prefer firm plans and predictability?

Can you afford a bigger mortgage payment if interest rates increase, or are your anticipated home expenses already stretching your monthly budget?

To help you get started, we’ve rounded up four of the most important factors to consider when narrowing your list of potential mortgage options.

Please keep in mind that the info you are about to read may feel overwhelming. There is a lot of industry jargon and terms you may not be familiar with.

But, we’ve got you covered! Just give Libby a call with any questions. Remember she has 13 years of experience in the mortgage industry, so she will be able to explain everything to you. 🙆🏼‍♀️

1. Your Credit Score

 That three-digit number that credit scoring companies like VantageScore and FICO assign not only influences your interest rate, but it also helps determine the type of mortgage you can get.

To secure a conventional mortgage from a major bank or credit union, you’ll typically need a FICO score of at least 620. But some mortgage types require even higher credit scores.2

For example, to qualify for a U.S. Department of Agriculture (USDA) loan to buy a qualifying rural property, you’ll need a minimum FICO score of 640.

Or, if you’re seeking a supersized loan, such as a jumbo mortgage (which are home loans above $766,500 to $1,149,825, depending on where you buy the home), you may need a FICO score of at least 700 or more.2

You still have options, though, if your credit score is lower.

You may be able to get a Federal Housing Administration (FHA) loan with a 580 credit score if you have enough cash saved for at least a 3.5% down payment.

And if you have at least a 10% down payment, you may qualify even if your score is in the 500 to 579 range.

Alternatively, if you’re a military service member, veteran or spouse, you may be able to get a U.S. Department of Veterans Affairs (VA) loan with little or no money down with a credit score in the 580 to 620 range.2,3

Some regional banks and credit unions may also be more flexible than others with minimum required credit scores.4

But if you can afford to wait, you may be better off paying down your debt first so your score can improve.

The interest you save with a more competitively priced loan could enable you to buy a more desirable home.

Your Takeaways

📱 Ask Libby or a mortgage professional what type of loan will suit your needs the best.

✨ Generally speaking, you’ll need a credit score of 620 to 740.

💸 Unless you are in the military, you’ll need a 10% to 20% down payment.

Your Income and debts will impact your motgage options

2. Your Income and Expenses

The amount of money you make, as well as how much you owe, will also influence your mortgage options.

Lenders like to see that you still have plenty of income left over after paying your expenses and generally prefer that you spend no more than 28% of your income on housing, or a maximum of 36% (which is the cap that federally-sponsored lenders Fannie Mae and Freddie Mac advise).5

A mortgage lender will also compare your expected income to the total amount of debt you’ll carry once you’ve bought the home.6

This is called your debt-to-income (DTI) ratio, and lenders consider it a key indicator of whether you can afford a particular mortgage.

In fact, research by NerdWallet found that a high DTI ratio is the most common reason mortgage applications get rejected.6

In addition to outstanding debts, lenders factor in other expenses unique to a home, such as property taxes, homeowners insurance, and homeowner association fees.

Your approval odds will be higher if you have a DTI ratio below 36%.7

But if you have great credit and ample cash, you may still be able to get a conventional loan with a DTI ratio in the 45% to 50% range.8

If not, you will likely need to look to other “non-conforming” loan types, such as government-backed mortgages.

With a FHA loan, for example, you may be able to get away with a DTI ratio of 43% to 57%, depending on your credit history and savings.

Similarly, if you qualify for a VA loan, you may be able to get one with a DTI ratio of 41% or more. USDA loans, on the other hand, are a bit stricter.

To get approved, your DTI ratio can’t be higher than 41% and your income must be below a certain threshold for your family type.6

Your Takeaways

📱 Ask Libby or a mortgage professional to help you discover what your debt-to-income (DTI) ratio is.

✨ Generally speaking, you can spend 28% of your income on housing, or a maximum of 36%.

💸 You can calculate your own DTI with this handy online calculator.

3. Your Expected Down Payment

The size of your down payment will also impact the type of mortgage you can get.

You don’t have to put down 20% to qualify for a conventional mortgage, but you will need a significant amount.

According to the National Association of Realtors, the median down payment amount in 2023 was 14%.

For younger buyers under the age of 33, it was 8%.9

In some cases, a larger down payment may also help you qualify for loans you might not otherwise.

For example, it can be tough to get a mortgage when you’re self-employed.

But some conventional lenders may be willing to work with you if you put down more than 20%.10

If your cash reserves are slim, then you may want to consider an FHA loan instead, which only requires 3.5% down.11

Or, if you qualify for a USDA or VA loan, you may be able to skip the down payment altogether and buy your home with no money down except for a small funding fee.11

Keep in mind, though, that a smaller down payment will likely mean a larger monthly payment.

Plus, you’ll not only pay more interest overall and be responsible for a larger principal, you’ll also need to take out mortgage insurance.

Conventional loans require private mortgage insurance (PMI) if your down payment is below 20%, while FHA loans always require insurance.12

How much you spend on mortgage insurance will also vary, depending on the size and type of loan you choose, as well as your credit score and other factors.

For example, FHA mortgage insurance premiums (MIPs) are generally more expensive than PMI and also require an upfront payment at closing on top of annual premiums.12

Insurance for adjustable rate mortgages (ARMs) also tends to be on the higher side.13

Your Takeaways

📱 Ask Libby or a mortgage professional to discuss your down payment options with you.

✨ Generally speaking, you’ll want to have 10% to 20% of the home price for a down payment.

💸 For a $500,000 home, a 10% down payment is $50,000 and a 20% down payment is $100,000.

Your Lifestyle and Risk Tolerance

4. Your Lifestyle and Risk Tolerance

In addition to your budget, one of the most important factors to consider when comparing mortgage options is your temperament.

For most Americans, a mortgage is a decades-long commitment. So it’s important to find one you can happily live with—and comfortably repay—for the long haul.

Most fixed rate mortgages, for example, are designed to last anywhere from 15 years to three decades or more, with 30-year mortgages being the most popular option.14

When you spread out your repayment over such a long period, monthly payment amounts are smaller, so you can slowly chip away at your debt at a leisurely pace. The catch is you also pay more in interest.

With a shorter mortgage term, by contrast, you pay less overall. But your monthly payment amount will also be much higher.15

For some homeowners, the long-term savings are worth it. But if keeping up with your mortgage requires significant lifestyle adjustments, then you may come to regret it.

Another way to lower your monthly payment in the short term is to choose an adjustable-rate mortgage (ARM) that offers a low fixed APR for a lengthy period (typically five, seven or 10 years) before changing to a variable rate.16

This can be an especially useful loan type if you only plan to stay in the home for a relatively short period.

But buyer beware: ARMs can be risky if you don’t plan ahead for a higher interest rate.1

Your Takeaways

📱 Ask Libby about the pros and cons of each mortgage type.

✨ Generally speaking, you’ll be considering a 15 year mortgage, or the more common 30 year mortgage.

💸 The longer the term of the mortgage, the more you’ll pay in the long run, but the less you’ll pay each month.

The Bottom Line

Ken and Libby Guthrie, Guthrie Group Homes, Knoxville TN
Ken and Libby Guthrie, Guthrie Group Homes, Knoxville TN

Regardless of the loan you choose, it pays to shop around and carefully compare terms.

According to research by LendingTree, most homebuyers risk leaving money on the table by sticking with the first lender that they meet.18

Fortunately, we have a vetted list of mortgage professionals who can explain your options, answer your questions, and help you find the best loan to meet your needs.

We can also develop a custom plan for securing 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:

1. Bankrate – https://www.bankrate.com/mortgages/home-affordability-report/
2. Bankrate – https://www.bankrate.com/real-estate/what-credit-score-do-you-need-to-buy-a-house/
3. U.S. News & World Report – https://money.usnews.com/loans/mortgages/va-loans
4. Newsweek – https://www.newsweek.com/vault/mortgages/bank-vs-credit-union-for-mortgages/
5. Bloomberg – https://www.bloomberg.com/news/articles/2024-05-17/how-much-income-do-you-spend-budget-for-home-mortgage-in-us
6. NerdWallet – https://www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage
7. Bankrate – https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/
8. Bankrate – https://www.bankrate.com/mortgages/how-interest-rates-are-set/
9. National Association of Realtors – https://www.nar.realtor/sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf
10. Bankrate – https://www.bankrate.com/mortgages/self-employed-how-to-get-a-mortgage/
11. Bankrate – https://www.bankrate.com/mortgages/no-down-payment-mortgage/
12. CFPB – https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/
13. Bankrate – https://www.bankrate.com/mortgages/basics-of-private-mortgage-insurance-pmi/
14. MPA Magazine – https://www.mpamag.com/us/mortgage-industry/guides/the-7-most-popular-types-of-mortgage-loans-for-home-buyers/255499
15. Investopedia – https://www.investopedia.com/articles/personal-finance/042015/comparison-30year-vs-15year-mortgage.asp
16. NerdWallet – https://www.nerdwallet.com/article/mortgages/adjustable-rate-mortgage-arm
17. Federal Reserve Bank of St. Louis – https://www.stlouisfed.org/on-the-economy/2024/feb/which-households-prefer-arms-fixed-rate-mortgages
18. LendingTree – https://www.lendingtree.com/home/mortgage/shopping-around-survey/

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Financing

What Recent Bank Failures Mean For Mortgage Rates (and You)

The recent collapse of Silicon Valley and Signature banks sent shockwaves through the financial sector, causing a ripple effect through the economy.

While the situation has been challenging, there’s also been a silver lining in real estate:

Mortgage rates are down.

Read on for a summary of the situation, as well as what it means for homebuyers, sellers, and owners like you.

Sincerely,

What’s Going On With Mortgage Rates

Historically, mortgage rates have followed the 10-year U.S. Treasury yield. A growing number of investors, concerned about instability in the banking sector, are now fleeing to the safety of these government-backed bonds. An increase in bond prices means lower yields—and lower mortgage rates.

But, this situation is rapidly evolving. On Wednesday, the U.S. Federal Reserve announced that it will hike its benchmark rate again as it continues its efforts to fight inflation, but this time by only a quarter percentage point. It also hinted that its series of rate hikes may be nearing an end.

Economists at the Mortgage Bankers Association (MBA) and National Association of Home Builders predict that this could put further downward pressure on mortgage rates.

“With this move from the Federal Reserve, MBA is holding to its forecast that mortgage rates are likely to trend down over the course of this year, which should provide support for the purchase market. The housing market was the first sector to slow as the result of tighter monetary policy and should be the first to benefit as policymakers slow—and ultimately stop—hiking rates,” said MBA SVP and Chief Economist Mike Fratantoni in a statement following the Fed’s announcement.

However, no one can predict with certainty how the market will react to the Fed’s policy moves—or how the banking crisis will play out and ultimately impact rates.

Bottomline: We could see some major volatility in mortgage rates in the coming months.

What All This Could Mean for You

BUYERS:

If you have considered buying a home, it’s important to be aware of the situation and to be prepared to lock in a low rate when the time is right. A lower mortgage rate could potentially save you hundreds of dollars on your monthly payment, so you can’t afford to miss out.

It’s also going to be crucial to work with knowledgeable real estate professionals (like us!) who are monitoring this situation closely as it continues to unfold. We can also refer you to a trusted mortgage professional, who can help you get pre-qualified for a home loan.

SELLERS:

A further dip in mortgage rates could bring more buyers to the market. These buyers may want to act quickly in case rates rise again.

If you’ve been on the fence about selling your home, now may be the perfect time. We can help you prep your home and get it listed quickly to take advantage of a possible increase in demand.

 HOMEOWNERS:

Depending on the terms of your current mortgage, you could save a bundle by refinancing if rates fall significantly. Let us connect you with a mortgage professional to discuss your options.

What Steps You Should Take Now

 You don’t want to miss out on this potential window of opportunity! Leave us a comment on this post or give us a call today to schedule a free consultation so you can be prepared.

And as always, don’t hesitate to reach out with any questions about this or other real estate issues. We would love to hear from you!

Call Libby at 📲 865-364-0200 or email her at 📧 [email protected]

 

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Financing

How Mortgage Loans Work

How Mortgage Loans Work
How Mortgage Loans Work

Unless you’re planning to pay all cash to buy a home, you’ll need help with financing the purchase. There are a number of names that all refer to financing for the purpose of buying real estate which includes mortgage, mortgage loan, home loan, bank loan, etc.

A mortgage loan is a contract that helps you finance the purchase of a house. You and your lender will work together to choose the best mortgage option for you. Then they’ll offer an amortization schedule that outlines payment periods to pay off the loan.

  1. A Mortgage Loan Includes:

    • The Loan Amount
    • The Interest Rate
    • The Term (length) of the Loan
    • Deadlines to Repay the Loan with Interest.

  2. Types of Mortgage Loans

    • Conventional Loans: These types of loans can be fixed-rate or adjustable-rate. A fixed-rate loan offers stability because it doesn’t change over the lifetime of the mortgage. An adjustable-rate loan depends on an index and a margin. In addition to the type of mortgage rate, you will also need to choose the mortgage term – the length of time that you’ll repay the loan. The mortgage term options are 30, 15, and 10 years. Selecting a longer mortgage term usually means you’ll make more payments and interest.
    • Government-Back Loans: Homebuyers with a small amount of savings but good credit can apply for a home loan from government agencies like the Federal Housing Administration (FHA), the US Department of Veteran Affairs (VA), or the US Department of Agriculture (USDA), among other types of loans.

  3. How to Qualify for a Mortgage

    Your lender will examine your credit score, debt-to-income ratio, income, and down payment before they determine whether you qualify for a mortgage loan. Therefore, you will need documentation to prove your financial history like W-2s, your bank account information, etc.

  4. Before Shopping for A Mortgage

    • Interview at Least 3 Lenders Before Choosing One: You want to get the best deal on a mortgage loan, so interview at least three lenders and compare their services and what they can offer you. If you need a referral to a mortgage broker, we can help you with that.
    • Know Your Credit Score: It plays a major role in getting approved and affects your interest rate. Generally, the higher your credit score is, the lower your interest rate will be. Before you request a credit score, there are 2 types of credit: Soft pull (soft inquiry) or hard pull (hard inquiry). A soft pull will not affect your credit score, and a hard pull will. Your lender will need to perform a hard pull before approving you for a loan, so if you want to review your credit before meeting with a lender be sure you get a soft pull credit report. *
    • Calculate the Amount You Can Afford: Just because a lender says you can spend X amount, doesn’t mean you should. You must also have enough savings to pay for any emergencies like if the water heater unexpectedly breaks. Use an affordability calculator to determine the amount of home you can afford while maintaining enough emergency savings and maintaining your desired lifestyle. You must also consider home insurance, property taxes, and closing costs.

* You can get a free soft pull credit report from financial websites such as creditkarma.com and you are entitled to a yearly free credit report from the big 3 credit agencies at https://www.annualcreditreport.com/index.action.

But a word to the wise, after getting your free report, all three agencies will try and sell you a monthly subscription to their credit report service. You don’t need these, so decline any paid services right now.

Also, there are plenty of other sites that pretend to offer free credit reports, like FreeCreditReport.com. Avoid sites like this!

In addition to the above-mentioned services, many banks offer free credit monitoring, if you have a credit card with them. While not as complete as what you will get directly from Equifax, TransUnion, and Experian – Credit Karma, and Annual Credit Report.com are excellent free sources to obtain and monitor your credit score.

Some of the banks that offer free credit scores include Capital One, Citibank, and Discover.

Conclusion

You did it! You completed our series for home buyers. Woohoo! And guess what? We have loads more info on buying a home, and other real estate related topics. Check out our real estate blog for more. Or maybe it’s time for a nap. That was a lot. 😅

Wait! What? You just found this article randomly? Start from the beginning at The Benefits of Homeownership

Disclaimers

Guthrie Group Homes has no affiliation with CreditKarma and this is not an endorsement of their services.

We are not lawyers, tax accountants, financial advisors, or mortgage lenders. Any information provided in this article should not be relied upon as specific advice and is intended for informational purposes only. Please seek professional advice from your lawyer, CPA, or other licensed financial advisors for your specific needs.

While this information should be helpful, it is not complete. There are many other things to consider regarding mortgage loans and real estate transactions. Be sure to consult your lender and Realtor with any questions you have.

Also, see our Frequently Asked Questions about Real Estate

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