Are you looking to buy a home but uncertain that your current income will not be enough to afford one? The nationwide shortage of affordable housing and higher interest rates have some people concerned that they may need to hold off buying their first home. However, with rent prices increasing – on average 13.6% nationwide in March 2022 compared to the previous year* – it often makes financial sense to be paying off your own home when your monthly mortgage payment helps you earn equity.
How can you overcome the financial challenges that the current housing market brings? Following these financial tips can place you in a better financial standing to be eligible for better mortgage loan terms and give you the confidence to achieve homeownership in the future.
Benefits of having a higher credit score
Your credit score plays a significant role in the mortgage loan approval process. While it is possible for you to get approved for a mortgage loan with a 620 credit score, you will likely be paying a higher monthly mortgage payment than if you had a credit score above 700.
Here’s an example of how your credit score can impact your monthly mortgage payment and the APR you are offered, based on interest rates provided by myFICO on May 25, 2022, for a 30-year fixed-rate mortgage for $400,000:
|Credit Score||APR||Monthly Mortgage Payment||Total Interest Paid
over term of the loan
|620 – 639||6.208%||$2,452||$482,703|
|640 – 659||5.662%||$2,312||$432,312|
|660 – 679||5.232%||$2,204||$393,569|
|680 – 699||5.018%||$2,152||$374,608|
|700 – 759||4.841%||$2,109||$359,091|
|700 – 759||4.619%||$2,055||$339,844|
If your credit is on the low end of the chart above, it might make sense to postpone buying a house while you work on building your credit and continue to save more towards your down payment and closing costs.
Some financial strategies to improve your credit score include aiming for a credit utilization rate below 30% and paying more than the minimum credit card balance on time each month. Our blog, 5 Steps That Can Improve Your Credit Score in 100 Days, provides practical tips on improving your credit to help you be in a better financial position.
Research low down payment loans and assistance programs
Although it can seem like purchasing a home is only a smart financial move as long as you have the money to do it, there are federal and state financial assistance programs available to reduce your out-of-pocket costs. We’ve highlighted a few of the common federal programs below, but speak with your loan officer to learn about the eligibility requirements for state-sponsored programs to see if you qualify.
FHA loans require a lower credit score and down payment than many other mortgage loans. If you have at least a 580 credit score and a debt-to-income ratio below 43%, you could qualify for an FHA home loan with a 3.5% down payment. Although you will be paying a mortgage insurance premium in addition to your monthly mortgage payment, paying a lower down payment will help you buy your home sooner.
VA home loans are mortgage loans financially backed by the Department of Veteran Affairs to assist eligible veterans, active-duty service members, national guard members, and some surviving spouses in attaining homeownership. There is a $0 required down payment with VA home loans, although you will pay a VA funding fee which can be financed to reduce your out-of-pocket costs.
USDA loans are low-interest, fixed-rate loans that do not require a down payment. The United States Department of Agriculture finances the home loans through a mortgage lender to homebuyers who want to purchase a home in specific rural or suburban areas and meet eligibility income requirements.
Down payment assistance programs reduce the amount homebuyers need to save for a down payment. Assistance can come in grants, second mortgages, deferred-payment loans, low-interest loans, or matched savings programs for homebuyers who meet the eligibility requirements.
State-sponsored assistance programs typically come in the form of grants from state agencies and nonprofits. Typically offered to first-time homebuyers, applicants are required to meet the eligibility requirements for the program, which can include a maximum income level for their household size.
Decide on an affordable monthly mortgage payment
Buying a home is likely the biggest purchase you will ever make, so deciding on an affordable budget is advisable before actively looking for homes. When your credit score, savings, and debts are at the level that you can qualify for a mortgage, it’s important to meet with your loan officer to get pre-qualified for a home loan.
It can be tempting to search for a house based on the total amount you are pre-qualified to obtain rather than determining if you can comfortably afford the monthly mortgage payment. However, it is essential to consider other costs associated with owning a home. You need to budget for closing costs (about 4% of the purchase price), moving services, annual property taxes, homeowner’s insurance, and utilities. If your down payment is below 20% on a conventional or FHA loan, you will also need to budget for monthly mortgage insurance.
A method for testing whether a certain amount will work in your current budget is to start setting aside that amount for a couple of months and seeing if it’s doable. If you can pay for your current monthly expenses and keep that amount to the side successfully, you have found a comfortable amount you can afford and move forward with purchasing your home.
Tip: You can use the 28% rule, which recommends that your mortgage should not be above 28% of your gross income each month, to help determine your monthly mortgage payment.
Create a goal and budget to save for your home
Before proceeding with your home purchase:
- Verify with your loan officer that you have enough money to cover your down payment, closing costs, and first month’s mortgage payment. You can accomplish this best by setting a goal to save money in a separate savings account.
- Be specific and clear when defining your goal, and formulate a plan on how you will achieve this goal.
- Create a detailed household budget to identify how you are spending your income. It can deter you from making unnecessary purchases and identify areas to reduce spending.
Tip: Make a list of your needs vs. wants. Look at your list of wants and try to reduce that list down as much as you can to save money!
For additional tips on creating a savings goal and budgeting, please read our blog, 10 Ways to Save for a Down Payment on a Home.
Don’t let your current salary discourage you from achieving homeownership. By following these tips and creating a financial plan, you can work towards saving enough money to feel financially secure with purchasing your first home.
* CoreLogic Single-Family Rent Index (SFRI)