When it comes to financial worries, anxiety over buying a house often ranks high on the list. But you don’t have to let house buying stress keep you from pursuing your home ownership goals.
6 COMMON MORTGAGE FEARS AND HOW TO OVERCOME THEM
Recognizing common mortgage fears—and knowing how to tackle them—can help you face down your own worries and empower you on your home buying journey.
Fear #1: Your credit score is too low to qualify for a loan.
Lenders evaluate several factors when determining whether to approve you for a loan. While your credit score is just one of those factors, it’s an important one.
Before you apply for a loan, review your credit report so you know where your credit score stands. If you see any errors, don’t hesitate to dispute them with the credit bureau that’s reporting the information. If you have any collection accounts on your record, consider paying them off, which could improve your credit standing.
Also, practice good credit habits as you prepare to buy a home. That means paying your bills on time, keeping your credit card balances low and limiting how often you apply for new credit.
Fear #2: You have too much debt or not enough income.
Along with your credit score, lenders also consider your debt-to-income ratio. This refers to how much of your income goes toward your debt each month. Each lender has its own set of standards regarding what’s an acceptable debt-to-income ratio; so the less income you have going toward debt, the better.
One of the more obvious ways to improve your debt-to-income ratio is to pay down some of your debt. Another possibility is increasing your income. There are a few different ways you can do this. Taking on more hours at work, working a part-time gig in addition to your full-time job, or starting a side hustle are all options for ramping up your monthly income.
Fear #3: You won’t have enough cash for the down payment.
If the prospect of putting 20 percent down on a home is adding to your house buying stress, don’t fret. It is possible to purchase a home with less than 20 percent down, although there is a trade-off. When you buy with less than 20 percent down, lenders typically require you to pay private mortgage insurance (PMI), which is added to your monthly payments.
Depending on your family situation, asking a family member for a down payment gift could be an option for overcoming the down payment hurdle while avoiding PMI. There is one caveat, however. If you’re considering a down payment gift, lenders require the gift to be thoroughly documented. Specifically, you’ll need a written statement from the person giving you the money saying that it is a gift. The letter must also include the dollar amount, the gifter’s name and contact information, their relationship to you, the date the money was gifted, and the address of the property you’re buying.
If using gifted money isn’t an option, consider down payment assistance programs, like the one offered by the National Homebuyers Fund. These programs, which are sometimes offered by government agencies and private organizations, offer help to qualifying borrowers. Some programs offer cash grants, while others offer a matched savings program, so you can move forward with your home purchase.
Santander’s Home Ownership Made Easy Program (The H.O.M.E. Program) gives buyers a path to owning a home when limited funds are an issue by providing them with low-down-payment mortgage options. No borrower funds are required on single-unit residences and down payments go as low as 3 percent for two-to four-unit residences. Qualifying borrowers can use gift or alternative funding to fill any gaps in their financing.
Learn more about how to start saving for a house.
Fear #4: Your interest rate will be too high.
Your mortgage’s interest rate determines how much your loan costs over time. Even a small difference in rates can significantly impact what you pay for a home loan.
For example, let’s say you’re buying a $200,000 home with a 20 percent down payment. You opt for a traditional 30-year loan with a fixed rate of four percent. Over the life of the loan, you’d pay $114,991 in interest on top of the home price of $200,000. If, however, you instead qualified for a rate of 4.5 percent, the total interest paid climbs to $131,851 — that’s a total difference of $16,860 over time from just one-half of a percentage point.
Getting the best rate possible is often a priority for homebuyers. The Consumer Financial Protection Bureau found that nearly half of borrowers don’t take time to shop around for a mortgage. Focusing on improving your credit before you apply for a loan could help you to land a lower rate — so could shopping around to find the best mortgage rate.
Comparing different offerings among mortgage lenders is worth your time, particularly if your credit history isn’t great. As the previous example illustrates, even half a percent difference in the rate can significantly impact what you’ll pay for a mortgage over time.
Running the numbers through a mortgage calculator may offer some additional insight into how your rate affects the cost of borrowing. You can also reach out to a Santander mortgage advisor if you’re concerned about qualifying for a low rate. Your mortgage advisor can help you compare borrowing options and ensure that you’re getting the best pricing possible based on your credit and financial profile.
Fear #5: You won’t have enough money to cover closing costs.
Down payments aren’t the only time you’ll need cash to buy a home. You also need to add closing costs to the equation. Closing costs typically range from two to five percent of the purchase price. Use a closing costs calculator to better prepare for what you may have to pay.
If you’re concerned about having enough cash to cover closing, consider asking the seller to pay some of the costs for you. The amount a seller can pay toward closing is determined by the type of loan you obtain. If this isn’t an option, ask the lender whether it’s possible to wrap some of the closing costs into the loan or delay closing until the end of the month, which would reduce the amount of interest and escrow fees you’d pay up front.
Fear #6: You won’t be able to afford your mortgage long-term.
Buying a home is a major financial commitment, and the prospect of not being able to keep up with your mortgage payments on top of other homeownership costs is certainly worrisome. Setting up an emergency fund to cover maintenance, upkeep, and unexpected repairs is one way to ease those fears. Also take a realistic look at your home buying budget and calculate how much home you can afford, erring on the conservative side to be safe.
It’s natural to feel some anxiety over buying a house, but the great feeling that comes from owning a home of your own can easily outweigh any jitters you might have. Still nervous? Read on to determine if you’re ready to buy a house.