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Life can be stressful for an aspiring first-time home buyer. There are people insisting that they should save up the “normal 20%” down payment, they’re told that The Banks insist on perfect credit, and they are bombarded by countless “rules of thumb” about how much home they can qualify to buy.
The average down payment is 11% nationwide, but the average for first-time buyers is even lower: 6%. While it is true that lenders require some form of mortgage insurance when the loan is for more than 80% of the property’s value, making a smaller down payment can be a financially savvy move.
If real estate values continue their upward trend, waiting to save up a large down payment can be costly. If properties are going up at the rate of, say, 3% each year, a $500,000 home today will go for $515,000 a year from today. That puts the cost of waiting at about $1,200 per month.
The cost of Private Mortgage Insurance (PMI) for a conventional loan varies according to the loan to value ratio and your credit score. A buyer getting a 90% loan (10% down payment) can expect to pay as little as .3% monthly for PMI. For a $500,000 home, the monthly premium could be just $113. Compare that with the cost of waiting to buy the same property at a higher price.
This is one of the more damaging myths making the rounds. People whose credit reports show a few bruises—in other words, normal humans—may be reluctant to apply for a mortgage for fear of being rejected.
The truth is that lenders are far more accommodating than many people believe. For a conventional loan, the minimum acceptable score is 620. For government-insured FHA loans with 3.5% down, 580 will work.
The typical lower-scoring borrower can have late payments on multiple accounts, possibly one or more that went to collection, and high credit card balances.
Many of the factors leading to lower credit scores are things that lend themselves to immediate correction. If an account appears on the credit report as “past due,” bringing it current can add a dozen points to the score immediately.
Similarly, credit cards whose balances are close to the credit limit can cost 20 or 30 points. Paying those balances down so they are below 30% of the limit can raise the score immediately by many points. A history of late payments will affect the credit score, but as they get older, their effect is much less. A low credit score is never permanent—and borrowers with low scores get approved every day.
The “rules of thumb” are all over the map. Some say that you should not spend more than 25% of your take-home pay on your house payment. Others insist that 28% of your gross monthly income is the maximum payment you can make.
While the share of your monthly income you choose to allocate to housing is a personal decision, lenders have their own guidelines—and they are more liberal than you might believe.
Lenders approve loans based on the debt to income ratio (“DTI”). This is the total house payment including taxes, insurance and mortgage insurance if any, plus monthly payments on other debts, such as car payments, student loans, credit card minimums, etc., all divided by your gross monthly income. Lenders routinely approve conventional loans with a DTI as high as 50%.
Someone earning $7,500 per month with $500 in other monthly debt payments could qualify for a monthly house payment of $3,250. With a 10% down payment, this would represent a purchase of about $550,000. With 5% down, the number would go to $515,000 because of the larger loan amount.
The real numbers lenders use are often significantly more than these well-meaning (but uninformed) “rules of thumb.”
In many areas, this may initially be true—but the difference in monthly cost can be misleading. It is important to keep some critical facts in mind when comparing the cost of owning and continuing to rent.
Although the check you write each month to your lender may be larger than the one you’d write to your landlord, part of your monthly payment reduces your principal balance. It is a sort of “forced savings account.” If your loan is $450,000, you’ll reduce the balance by about $7,200 in the first year—$600 per month.
The second fact to keep in mind is that sooner or later rents will increase. While landlords don’t always increase rents every year, the time will come when rents will go up to reflect the market. When you own your home, your fixed-rate mortgage payment will remain the same. Eventually, your house payment will be less than what you’d pay to rent the same kind of home.
There are many reasons why pre-arranging your financing should be one of your first steps. Among these are knowing how much home you can get approved to buy and setting your personal home buying budget. You should also know that sellers today are reluctant to accept an offer from a buyer who has not been pre-approved by a lender.
Even though most purchase agreements have “loan contingencies,” sellers don’t want to take their properties off the market for the two or three weeks it might take to complete the loan unless they are certain the deal will close.
When you have a preapproval letter to give the seller along with your offer, it shows them that you are serious—and in their minds, the chances of your purchase going through are much higher.
Everyone wants to know they have gotten the best deal possible; but getting a Seattle mortgage is a process, not a commodity you can simply pull off the shelf. While your loan is being submitted, underwritten, approved and funded there are many steps involved, and many occasions where your partnership with an experienced loan officer can make the difference between a purchase that closes on one that seems to take forever and is full of setbacks and stress.
Many first-time buyers receive an unwelcome surprise when they learn that the down payment is only part of the expense involved in buying a home. There is also the matter of closing costs.
The additional costs involved in buying a home include title and escrow fees, appraisal, notary, recording, underwriting, processing and document preparation. You can also expect to deal with items paid in advance, such as your first year’s hazard insurance premium and deposits for the payment of taxes and insurance. Your loan officer can give you an itemized list of those costs for different purchase scenarios.
If your cash is limited, you may want to consider the possibility of asking the seller to help you with some or all the closing costs. As the market becomes more buyer-friendly, some sellers are willing to consider this.
Buying your first home in Seattle, WA is an exciting adventure. It can carry a lot of stress, but being able to separate fact from myth is the first step to making your home buying process enjoyable and above all, successful. View the 7 Steps to Get a Home Loan to get started today!
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington offering many mortgage programs to borrowers in Oregon, Idaho, Colorado, and Washington. Contact us today with any questions you have about mortgages.
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