A mortgage is likely to be the largest loan you take out over the course of your lifetime. Since a mortgage term can last up to 30 years, it makes sense to find one that is affordable. Here are some simple tips to keep in mind when seeking an affordable mortgage:
Be Realistic About What You Can Afford
To avoid the possibility of foreclosure, it’s important to be realistic about your earnings and how much you can afford to pay on a monthly basis. To assess your borrowing capacity, in addition to your credit score, mortgage lenders use what’s known as the “28/36 Rule.” This basically states that a household should spend no more than 28% of its gross monthly income on housing, and no more than 36% on total debt service. Use a mortgage calculator to help determine how much you can comfortably afford and whether it falls within the 28/36 Rule.
Make a Larger Down Payment
Many mortgage lenders typically require a down payment of 20% of the purchase price of the property. If you are able to make a larger down payment, this could effectively lower the amount of your monthly mortgage payments. In some cases, a larger down payment could also help you get offered a lower interest rate on your loan. If you’re unable to make a down payment of 20% or greater, you may be able to qualify for a government-secured FHA loan, which would typically require lower minimum down payments and credit scores than many conventional loans.
Aim for a Good to Excellent Credit Score
Borrowers of conventional home loans usually need at least a score of 620 to have a chance for approval. Aiming for a credit score in the “good to excellent” range — generally over 700 — will increase your likelihood of approval, in addition to offering you better loan terms. The higher your credit score is, the better mortgage terms you will be offered. This can make a huge difference in the long term, as just a few tenths of a point off the interest rate can greatly lower the amount of interest paid over the life of the mortgage.
Shop Around for the Best Terms
Home loans are available from several types of lenders — commercial banks, thrift institutions, mortgage companies, and credit unions. They can also be secured through a mortgage broker. Lenders and brokers may offer different prices for the same loan terms to different consumers, even if those consumers have the same loan qualifications. As a result, you should contact several lenders to ensure you’re getting the best deal.