Claudia Hargrove Thoughts

Mortgage Tips For 2017

1. You can make a small down payment — or none at all

Lenders say they often dispel the mistaken idea that homebuyers have to make down payments of at least 20 percent. In fact, some loan programs allow qualified people to buy homes with no down payment at all. Other loan programs allow down payments as small as 3 percent or 3.5 percent. The Department of Veterans Affairs guarantees zero-down VA mortgages for qualified borrowers: veterans, active-duty service members and certain members of the National Guard and Reserves. The U.S. Department of Agriculture guarantees zero-down mortgages as part of its Rural Development program. The loan guarantees are available in eligible areas — mostly rural areas, though some are suburban. Navy Federal Credit Union offers zero-down mortgages for qualified members to buy primary residences. Finally, Federal Housing Administration-insured mortgages allow down payments as small as 3.5 percent. And a few lenders offer conventional mortgages with down payments of as little as 3 percent with private mortgage insurance.

2. With FHA, you can get a loan with imperfect credit

Federal Housing Administration-insured loans are appealing because they’re widely available to borrowers with imperfect credit. In 2016, the average credit score for an FHA homebuyer was around 686, while the average conventional homebuyer had a credit score around 753. You need a credit score of 580 or higher to get an FHA-insured mortgage with a down payment as low as 3.5 percent. If your credit score is between 500 and 579, you need to make a down payment of at least 10 percent to get an FHA mortgage. But first you would have to find a lender that would approve the loan. Here are more crucial facts about FHA loans.

3. Keep some savings in reserve

Mortgage lenders don’t want you to deplete your savings on the down payment and closing costs. They want you to have “reserves” — cash, or assets that can be sold quickly, so you can take care of unexpected expenses without missing house payments. Your lender will calculate the minimum reserves you’ll need to qualify for a mortgage. There’s a possibility that the reserve requirements will oblige you to unexpectedly make a down payment of less than 20 percent, triggering the need for mortgage insurance. To avoid mortgage insurance in this case, you’d have to cancel the deal, scrape up more money for a down payment and wait while you put aside more money. Lenders would rather you have an emergency fund than not, even if it means you’ll have to make higher house payments because of mortgage insurance. Depleting your reserves is just one of five first-time homebuyer mistakes.

4. You can save by refinancing into a 15-year loan

Even though mortgage rates are likely to rise in 2017, some homeowners will have reason to refinance. There are various refi triggers, even after interest rates have risen above record lows:

  1. Divorce.

  2. Finally recovering from a low credit score.

  3. To get rid of mortgage insurance.

  4. Finally having positive equity.

  5. To cash out some equity.

  6. To save money in the long term by refinancing into a 15-year loan.

The last item — refinancing into a 15-year mortgage — saves money in two ways: 15-year mortgages tend to have lower interest rates than 30-year loans, and you pay interest over a shorter period. In most cases, the monthly payments on a new 15-year mortgage are higher than for a 30-year loan, but the total interest paid over the life of the loan is less. There are also drawbacks to refinancing into a 15-year mortgage.

5. Borrow what you can afford to repay

When people buy homes, they often “stretch” to make their initial monthly payments, on the theory that their incomes will go up over time, making house payments easier to cover. But it’s smarter to live within your means. You can move up to a more expensive house after (and not before) your income rises. A conservative rule of thumb is that all of your monthly debt obligations, including the house payment, shouldn’t exceed 36 percent of your income before taxes. Let’s say your household income is $5,000 a month: The monthly house payment, car payments, student loans, credit cards, child support and other obligations shouldn’t be more than $1,800, or 36 percent of that $5,000.

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