Zeroing in early on the type (or types) of mortgage you can afford can help save you money, time, and frustration \u2014 and this prep work can even help you avoid financing hiccups and delays so you can get into your dream house before someone else<\/i> does.<\/p>\n
\u201cThe main thing is just to really educate yourself,\u201d explains Richard Helali, one of HomeLight Home Loans’<\/a> expert loan officers.<\/p>\n \u201cResearch online, but then talk to a loan officer and ask questions. It will all depend on your specifics.\u201d<\/p><\/blockquote>\n Indeed, every borrower\u2019s specific financial picture, employment situation, and other personal details will ultimately determine the type of mortgage they can afford \u2014\u00a0and the best one to choose.<\/p>\n \u201cSometimes the terms of a VA loan are better for veterans than conventional loans, and sometimes that might be the other way around. Just because somebody is a veteran doesn’t mean that\u2019s always the best loan for them,\u201d Helali says.<\/p>\n \u201cJust because somebody has a couple of blemishes on their credit doesn\u2019t mean an FHA loan<\/a> is going to be the best. And it\u2019s not true that a conventional loan is only for people who have perfect credit. People\u2019s best loan might be different from the one they expect. That can happen, and it happens more often than you think.\u201d<\/p>\n Our expert-backed guide breaks down the basics of mortgage loans to help you understand lenders\u2019 behind-the-scenes decision making and help you determine what mortgage loan you can get \u2014 and afford to pay.<\/p>\n First, the basics: There are several factors that comprise a monthly mortgage payment<\/a>. These are:<\/p>\n This refers to the amount of money you initially borrow toward the price of the home.<\/p>\n So let\u2019s say you buy a home for $250,000 and you put $50,000, or 20%, down on the home when you buy it. Subtract that down payment<\/a> from the home\u2019s price and you get $200,000, which is your principal balance<\/a>. This is the amount of money you need to borrow to buy the house, and you\u2019ll eventually pay it off over monthly payments.<\/p>\n Interest is the money you pay the lender in exchange for giving you the loan.<\/p>\n Lenders typically calculate interest in terms of an annual percentage rate, or APR. Your APR is a complicated formula that includes your \u201cnote rate,\u201d which is your base interest rate, plus any finance charges you paid as a condition for the mortgage<\/a>. As a simplified example, if you borrow $200,000 for that house, and your APR is 5%, you will pay $10,000 per year for the privilege of borrowing the money.<\/p>\n You are required to pay property taxes annually. So take that amount and divide it by 12 to figure out how much you owe monthly.<\/p>\n Homeowners insurance<\/a> may (through an escrow account) or may not be included in your monthly mortgage payments. Either way, calculate your monthly outlay by dividing your annual homeowners insurance payment by 12.<\/p>\n Mortgage insurance<\/a> protects a lender if a borrower stops making payments on the mortgage. So lenders require most borrowers who don\u2019t put 20% down to pay this additional expense (unless you\u2019re getting a VA loan).<\/p>\n Beyond all these fixed factors, make sure you are considering home maintenance<\/a> and other inevitable expenses when evaluating your own ability to comfortably cover your monthly mortgage payments<\/a>.<\/p>\n Lenders\u2019 evaluations investigate multiple factors specific to each borrower.<\/p>\n \u201cA lot of it is based on credit history, credit score, income, and funds available for down payment,\u201d Helali explains. \u201cThose are the main variables, among thousands of other little details behind the scenes.\u201d<\/p>\n Let\u2019s break down those main categories.<\/p>\n The amount of debt and income the borrower has, and the ratio between these figures. You\u2019ll see this represented by the acronym DTI, for debt-to-income ratio<\/a>.<\/p>\n Typically, lenders prefer that no more than 45% (and in some cases up to 50%) of the borrower\u2019s total monthly income is dedicated toward repaying all of their debt \u2014 including the mortgage. Lenders may extend loans at the higher end of this scale to borrowers with strong compensating factors like higher credit scores and solid savings.<\/p>\n For some people, \u201cincome\u201d is pretty straightforward. For others, it\u2019s not.<\/p>\n \u201cSomebody might have a special type of income where compensation includes commission and bonuses,\u201d Helali says. \u201cIt depends on the person’s work history as to how much of a commission or bonus a bank is allowed to count towards qualification.\u201d<\/p>\n Obviously, the more cash you put down toward a down payment, the smaller the mortgage you will seek as a fraction of the total home price.<\/p>\n Lenders will also look at cash on hand for the borrower\u2019s ability to cover the closing costs<\/a> for buyers, which typically fall between 2% and 5% of the home\u2019s purchase price.<\/p>\n While there\u2019s technically<\/i> no minimum credit score required to buy a home<\/a>, your own credit score will certainly impact the type of loan you might qualify for. Multiple factors go into your credit score<\/a>, including credit availability, payment history, and credit mix.<\/p>\n If you have bad credit, are you out of luck all together? Not necessarily.<\/p>\n \u201cIt depends on what happens as a result of a blemish on your credit, or a gap in employment, or a layoff, and\u00a0that\u2019s going to be different for everybody,\u201d Helali explains.<\/p>\n \u201cYou might still be qualified for a conventional mortgage but it’s also possible that you might need some sort of government loan program that allows expanded eligibility. It does come with a cost, but that might be the best for you.\u201d<\/p>\n Let\u2019s take a closer look at the various types of mortgage loans on the market and dig into which ones might be right for you based on your personal financial picture.<\/p>\n As the name suggests, these are larger mortgages that exceed the maximum loan limits set by the Federal Housing Finance Agency. The government does not back these mortgages.<\/p>\n The cutoff amount for jumbo loans varies around the country<\/a>. In many places, it\u2019s $548,250, but in more expensive housing markets, it can be up to $822,375.<\/p>\n For this type of loan, you typically need a credit score of 700 or higher, a down payment of at least 10%, and a maximum debt-to-income ratio of 45% to qualify.<\/p>\n Best for:<\/b> Buyers with high incomes and excellent credit who are purchasing high-end homes, or homes in unusually expensive areas.<\/p>\n This is a private mortgage loan, not backed by the government. These typically require a minimum credit score of 620, with a maximum debt-to-income ratio of up to 50% for strongly qualified buyers. You\u2019ll need to put money down with this loan \u2014 at least 5%, or even as low as 3% for certain qualified borrowers.<\/p>\n Best for:<\/b> Buyers with average credit and some savings for a down payment. Most buyers get conventional loans. (In fact, recent Ellie Mae data from June 2020<\/a> puts that number at more than two-thirds of all buyers<\/a>).<\/p>\n The federal government offers a range of loans and programs that might work for you based on your individual financial or employment characteristics. If you see yourself in any of these categories, you may qualify for a loan program that can help get you into more house than you thought was possible.<\/p>\n These loans are backed by the Federal Housing Administration<\/a> and are only issued by FDA-approved lenders. They\u2019re easier to qualify for than conventional loans: You\u2019ll need a minimum credit score of 580, a minimum down payment of 3.5%, and you must have mortgage insurance for this type of loan.<\/p>\n Best for:<\/b> Buyers who might not have the best credit but are otherwise financially ready to buy a home.<\/p>\n These are loans for members of the United States armed forces, veterans, and their qualifying surviving spouses. The Veteran\u2019s Administration<\/a> backs this program and offers the loan through approved lenders.<\/p>\n Borrowers should have a minimum credit score of 620 (though there is technically<\/i> no minimum requirement), and the VA typically requires borrowers to have a maximum debt-to-income ratio of 41% (though this can push higher for certain qualified buyers).<\/p>\n Best for:<\/b> Anyone who has been in the military and can qualify.<\/p>\n The United States Department of Agriculture backs these loans for buyers of homes located in eligible \u201crural\u201d areas<\/a>. These loans place a cap on borrowers\u2019 incomes; as of 2020, the standard USDA loan income limit in most areas is $90,300 for households up to four members, and $119,200 for households from five to eight members.<\/p>\n This loan requires a 640 minimum credit score and allows a maximum debt-to-income ratio of 41%. Some borrowers can get this loan without putting money down<\/a>.<\/p>\n And while all USDA loans include a very low \u201cguarantee fee\u201d both upfront and annually, these fees are generally much lower than your average mortgage insurance, either private or otherwise, offered with other conventional or other government programs. .<\/p>\n Best for:<\/b> Borrowers in rural areas who do not exceed the income cap.<\/p>\n The Homes for Heroes Foundation provides money for housing or emergency financial assistance for community heroes \u2014 not just teachers, but also vets, firefighters, law enforcement personnel, and healthcare and emergency workers.<\/p>\n Buyers get closing cost discounts by way of real estate agents, lenders, and title and inspection professionals affiliated with the program and save 0.7% of the purchase price (that\u2019s $700 on every $100,000). Applicants for this type of loan must put a minimum of 3.5% down (this can be a gift from a relative) and have a minimum credit score of 620.<\/p>\n Best for:<\/b> People who meet the employment qualifications, have average credit, and have enough for a small down payment.<\/p>\n This program helps make homeownership possible for public servants<\/a> like law enforcement officers, K-12 teachers, emergency workers, and more. These homes will be in neighborhoods designated by HUD as \u201crevitalization areas,\u201d based on criteria including household income, homeownership rate, and the rate of FHA-insured mortgage foreclosure activity.<\/p>\n In addition to fitting into one of the qualified employment categories, borrowers must live in the house as a primary residence for at least three years. Qualified buyers get a 50% discount on these homes, and can put as little as $100 down<\/a>.<\/p>\n There are no income limits \u2014 and these aren\u2019t just available to first-time buyers. Borrowers must meet the minimum credit score requirements for FHA, which means you can participate in the program with a credit score as low as 500, but you\u2019ll need a minimum credit score of 580 to qualify for the lowest down payment. If your credit score falls between 500 and 579, you\u2019re limited to a maximum loan to value of 90%.<\/p>\n![\"a](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/What-mortgage-can-I-afford-4-666x381.png\")
<\/a>What goes into a mortgage?<\/h2>\n
Principal<\/h3>\n
Interest<\/h3>\n
Taxes<\/h3>\n
Insurance<\/h3>\n
Mortgage insurance<\/h3>\n
![\"Some](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/What-mortgage-can-I-afford-3-666x381.png\")
<\/a>How do lenders determine loan eligibility?<\/h2>\n
Debt and income<\/h3>\n
Savings for down payment and closing costs<\/h3>\n
Credit score<\/h3>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/What-mortgage-can-I-afford-2-666x381.png\")
<\/a>What mortgage can I afford\u2026 and what are my options, anyway?<\/h2>\n
Jumbo loan<\/a><\/h3>\n
Conventional loan<\/a><\/h3>\n
Government-backed loans and programs<\/h3>\n
FHA loan<\/a><\/h3>\n
VA loan<\/a><\/h3>\n
USDA loan<\/a><\/h3>\n
Homes for Heroes<\/a><\/h3>\n
Good Neighbor Next Door<\/a><\/h3>\n
![\"Two](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/05\/What-mortgage-can-I-afford-666x381.png\")
<\/a>