If you've been finding it hard to choose a mortgage, you're not alone. Home loans…
Applying for a housing mortgage can be nerve-wracking and downright scary. But it doesn’t have to be!
You might not be able to secure the home loan you are targeting, or you might be approved for an interest rate or down payment amount you cannot afford. But whatever your fear, there are things you can do to up your chances of getting the home mortgage that’s right for you.
Credit Scores and Low Income
Whether you are a first-time homebuyer or a seasoned homeowner, one of the biggest hurdles to purchasing your dream home can be low income. Although credit bureaus don’t account for income when computing for your credit score, income can still have an impact on your financial behavior. Depending on your self-discipline and determination, a low income can mean delayed payments on bills and other responsibilities, leading to more penalty fees paid. It can also have a detrimental effect on your spending habits. And when you tend to scrimp by buying lower quality items, you can actually spend more in the long run.
For example, buying unhealthy food can oftentimes be cheaper, but this can have a terrible effect on your overall health, giving you a tendency to fall ill much easier.
Today, we’re going to give you some tips when applying for a home loan on today’s mortgage rates. This is absolutely possible even for low-income households! We will also be discussing what your options are depending on your qualifications.
How to Improve Your Credit Score
Whether you plan to apply for personal loans or a mortgage, it is paramount that you improve your credit circumstances. Make it your business to do the following things soon!
Read your report. The bank officer will read your report anyway, so you might as well know what it says about your finances before they do. Sometimes, the reason you have a low score can be due to erroneous entries in your report, which should rightfully be corrected. Try to do this ahead of time so that your application can reflect a more accurate view of your financial behavior.
Pay off most of your debt. Before you let financial institutions in on your intent to apply for a home loan, try to pay off as much debt as you can. A big chunk (30%) of your score relies on your total amounts owed. When the bank sees that you have fewer payments needed to be made, this can increase your chances of getting approved for the loan you need. This action will also improve your debt-to-income ratio, which is another factor the bank will use to decide on your loan.
Utilize credit cards. It’s time to forget your fear of credit cards! Even on an average score, you might be eligible for a card with enough savings. Talk to your bank to find out if you can get a secured one. Once you have one in your hand, you can use it in your daily transactions so that you can build a better credit history. Good payment history means more points for your rating. Remember, use it only when you have the money to pay for the purchase anyway!
When you don’t have the financial capacity to pay for your house in cash, you can try applying for mortgages. This is often the wiser option when you think about how important it is to keep liquidity, especially uncertain times.
Mortgages are basically home loans wherein your house serves as collateral. Meaning, if you are unable to repay your full loan amount, your house can go to the bank or lender through a foreclosure. This is the worst-case scenario. If you’re lucky, you might be able to talk with your mortgage lender about a refinance of your mortgage if you’re not yet past due on your loan.
According to which institution insures your mortgage, there are different kinds of mortgages: depending on the term (life of the loan) and based on how often your interest rate changes. This article will only discuss those that can serve as good options for potential borrowers on a low income.
Fixed-Rate Mortgages vs. Adjustable Rate Mortgages
The moment you get approved for a home loan, this means that you will be paying more than your house’s purchase price due to the interest rate that will be applied to your debt.
Your mortgage can either be a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). The best mortgage option between the two will depend on the direction of the loan market. You will have to observe if interest rates are increasing or continuing to decrease.
As it is called, an FRM has a fixed interest rate. Since a higher interest rate means higher monthly payments, having a fixed rate can protect you from unfavorable changes. However, if the opposite occurs and interest rates steadily go down, you can end up losing money with an expensive monthly mortgage payment. When this happens, it may be time to negotiate with your lender or refinance your mortgage.
You can either refinance your mortgage into an adjustable rate or apply for an ARM from the start. As the term implies, when you have an ARM, you get a variable rate of interest that depends on the prevailing index. Your initial interest rate is fixed for a certain time before it increases periodically according to a set frequency. This can be a good option if you observe that interest rates are getting lower and lower. Once you notice that interest rates have reached a stable level, you can try converting your mortgage back to a fixed rate.
Heavily affected by the COVID-19 pandemic and the election, mortgage rates in 2020 decreased at a steady rate. However, as vaccines became available at the start of 2021, mortgage rates have finally started picking up again, although not quite on the same level as they did pre-pandemic.
Please note that each time you refinance means additional expenses because it will be treated as another mortgage application with closing costs and other fees. It is important to weigh the pros and cons of your decision for as long as you need.
There are available opportunities from the government that you might qualify for when it comes to low-income options, depending on your situation.
Let’s find out if you might meet the requirements of any of them.
A USDA loan is a mortgage option insured by the U.S. Department of Agriculture. It is one of the zero-down payment mortgages offered by the government. With a USDA loan, you are basically required to purchase real estate in a rural area regardless of your profession or industry.
With no down payment asked for and low-interest rates, this is the ideal opportunity for many Americans who receive low incomes. However, the lender will still need to consider your credit rating. When you score 640 or higher, you might experience a more streamlined application process. Below this number, you might have to present less traditional credit references.
If you are interested in finding out if your real estate area is eligible for a USDA mortgage, you can visit this link.
The U.S. Department of Veterans Affairs (VA) also gives veterans, active duty members, and their spouses opportunities so that they can settle in their own homes. VA loans are another zero-down payment mortgage meant for those with low incomes.
VA loans are one of the most generous loan options out there. Aside from zero down payment, other benefits include limited closing costs that might be shouldered by the house seller, zero private mortgage insurance premiums and available assistance from the VA when the borrower encounters difficulty with mortgage payments.
However, if you are ineligible for USDA loans or VA loans, you can have one last fallback through a Federal Housing Administration (FHA) loan.
This particular mortgage type was created with first-time home buyers and low-income households in mind. In 2020, the down payment for FHA loans started at 3.5% if you had a credit rating of at least 580. If you have a score between 499 and 580, you can still be qualified for an FHA loan, provided that you make a 10% down payment on your home loan. Your down payment doesn’t even have to come straight from your savings. The FHA allows you to get 100% of your down payment funds from cash gifts or grants from assistance programs.
Do take note that with an FHA loan, however, you will be obligated to pay mortgage insurance premiums.
Mortgage Loans Rates
The mortgage rate applied to your monthly payment will depend on your prescribed interest rate.
Since you need to shop around for lenders and compare rates, it is important to distinguish between the interest rate and the annual percentage rate.
Annual Percentage Rate (APR)
The annual percentage rate may look like an interest rate, but as you will notice, it varies from lender to lender.
When we talk about mortgage rates or interest rates, this is a singular variable with no other component. APR, on the other hand, reflects broader costs that lenders define. Often, the mortgage APR will include the mortgage rate and fees, and costs that that particular lender will charge. For this reason, you will observe that the APR is always higher than the actual mortgage rate.
Under The Truth in Lending Act, you are protected from opaque practices of lenders. Keep in mind that you have the right to transparency, including finding out exactly what fees lenders include in their APR. Make sure you find this out from your loan officer.
Current Mortgage Rates
Before you compare mortgage rates, here are some important questions you need to ask yourself:
- Am I looking to purchase/refinance an existing loan?
- Where am I looking for housing?
- What is my budget? What is my target loan amount?
- What is my credit score?
- Do I want to get a 15-year fixed-rate, 20-year fixed-rate, 30-year fixed-rate, or 5/1 ARM?
- Do I qualify for a USDA loan or VA loan?
Your preferred loan term, your discount points, your taxes, and insurance are all factors you have to consider when you compare and contrast your options. Remember, different lenders have different criteria for approving borrowers.
Check out this link to see the current mortgage rates from different lenders, including APR, upfront costs, and monthly payment according to your loan amount.