Dating apps like Bumble and Hinge make searching for your soulmate as easy as swiping left or right. The seemingly endless possibilities of a match can make it hard to commit. But unlike daters who may think their perfect partner is only a few swipes away, it might be harder for homebuyers to figure out which mortgage is right for them.
Whether you’re a first-time homebuyer or a repeat shopper, the truth is, IDing your ideal mortgage begins with knowing exactly what you’re looking for in your next home and how much you can afford to spend. Are you married to the idea of living there happily ever after, or are you interested in a short-term fling?
How to set a budget for your home purchase
It may not be glamorous, but you can’t start your home search without some budgeting to figure out how much house you can actually afford. A good place to start is determining your debt-to-income ratio (DTI) by using our Home Affordability Calculator.
DTI is calculated by taking the amount of your monthly debt payments (credit card debt, student loans, etc.) and dividing it by your gross monthly income. Ideally, your DTI is below 43%. While you could get a mortgage with a higher DTI, the lower the better for both you and your lender.
If you’re on the hunt for a mortgage, there are some additional costs buyers often overlook until after they’ve said “yes” to the address. You’ll need to account for all the expenses of getting a mortgage, including the down payment and closing costs (which typically fall between 2 and 5% of the home’s price and include expenses like title charges, real estate taxes, and homeowners insurance). Traditional thinking says that you need 20% of the home’s cost for your down payment. But don’t panic if you don’t have that much saved up. Some lenders will accept as low as 3.5%. (More on this below.)
Take note: The smaller the down payment you start with, the more risk there is for your lender. So if you make a down payment that’s less than 20%, it’s likely you’ll have to pay for private mortgage insurance (PMI).
If you can afford to put down 20% (or more), your benefits could include: increased home equity, decreased monthly payments, and potentially thousands saved in interest charges.
You should also review your credit history before beginning your home-buying journey. Your credit score can have a major impact on your ability to get pre-approved for different types of home loans, as well as the interest rate (which is determined by a number of factors) you qualify for.
While loans are available for those with not-so-great credit, taking steps to initially improve your score will benefit you (and your wallet) in the long run.
Explore your loan options
Once you have an idea of your budget, it’s time to get to know all the different types of home loans available to you.
Conventional Loans
Conventional loans are the most common type of mortgage. There are two types: conforming and non-conforming.
While not insured by the federal government, conforming loans meet the guidelines set by government-sponsored companies Freddie Mac (the Federal Home Loan Mortgage Corporation) or Fannie Mae (the Federal National Mortgage Association).
Non-conforming loans do not meet borrowing criteria set by lenders, whether that’s because the amount is higher than the conforming loan limit or the borrower doesn’t have the standard amount of credit or collateral.
The most common type of non-conforming loans are jumbo mortgages, which exceed the loan limits set by Frannie Mae and Freddie Mac. Jumbo loans are more common in affluent areas where homes are pricier.
If you have strong credit, a steady income, and can make a down payment of about 5% or more, settling down with a conventional loan is likely a good option. But if you’re buying a more costly home, you’ll need to up your game and make a deeper commitment since you might need a non-conforming loan. To qualify, you’ll typically need a top-notch credit score (above 700), low debt-to-income ratio (below 45%), and must be able to afford a higher down payment.
Non-conventional loans
Depending upon your personal situation, you might be eligible for a government-backed loan, or non-conventional mortgage. The three types you may consider are a Federal Housing Administration (FHA), a United States Department of Agriculture (USDA), or a Veteran’s Affairs (VA) loan.
FHA
FHA loans are for people who don’t have the best credit or can’t afford a large down payment — only 3.5% is required — making them a good option for first-time homebuyers.
FHA mortgages require you to commit to a mortgage insurance premium (MIP) that you’ll pay for the life of the loan. (Unless you can put 10% down, in which case you’ll pay an annual premium for 11 years.) So while the low initial payment is undoubtedly attractive, be aware that you may be adding thousands of dollars to your mortgage over time.
USDA
Managed by the Rural Housing Service, these mortgages are provided to qualifying borrowers in rural areas with low-to-moderate incomes. Some USDA loans don’t require a down payment and may offer below-market interest rates.
VA
Whether Army, Navy, Air Force, Marines, or Coast Guard (active duty or a veteran), if you’ve served our country, you are eligible for a Veteran’s Affairs loan. These mortgages are flexible, require little-to-no down payment, and have low interest rates.
Fixed vs. adjustable-rate mortgages
If you’re planning on a long-term relationship with your next home, a fixed-rate mortgage may be the loan you’ve been looking for. With a fixed-rate loan, the interest rate won’t change over the life of the loan, and because your monthly payment will stay the same, you can plan your budget for months and years ahead.
Fixed-rate mortgages typicalliedtrustcu.orge in 15, 20, and 30 year terms. But keep in mind, while longer mortgage terms may mean lower monthly payments, you’ll likely end up paying more overall in interest.
If fixed-rate mortgages are steady and dependable (the boy next door of mortgages), adjustable-rate mortgages (ARMs) can be thought of as the bad boy of the mortgages: less predictable and possibly risky, but with the potential of big savings that make your heart soar.
When you get an ARM, you’ll often have a lower interest rate than a fixed mortgage would offer for the first few years (usually between 3 and 7) — making it more attractive. But after that initial period, your interest rate could adjust repeatedly throughout the duration of your loan.
If interest rates rise, the cost of your monthly payments will increase with an ARM. (An interest rate hike may not seem like a big deal now, but it could cause your mortgage payments to become unmanageable in the future.) Likewise, if interest rates fall, your payments could decrease.
If you only plan to live in your home for a couple years, an adjustable-rate loan may not be a bad idea — you can enjoy the lower interest rate before you say, “Thank you, next.”
Credence Global Bank Unionoffers both fixed rate and adjustable-rate mortgages — both with competitive interest rates and loan options tailored to your specific borrowing situation.
Ready to swipe right on a mortgage?
Potential homebuyers have a lot of options when it comes to selecting a mortgage. Finding the right one for you begins with knowing your financial situation. Once you’ve determined your budget and figured out which type of loan fits your lifestyle, you can start living happily ever after.
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