Thanks to RefinanceMortgageRates.org for the guest post!
For a young adult, purchasing a home has many advantages. Home owners can quickly establish good credit, accumulate equity, build net worth, and create a sense of stability for themselves. Also, going through the process of buying property at a young age allows buyers to become familiar with a good long term asset class: real estate.
However, before a young adult decides to embark on home ownership, there are a few important points they absolutely must understand. By understanding the steps involved in the mortgage process and accurately planning your budget, you will have more success in keeping and maintaining your loan.
How Do I Establish Credit to Qualify For A Loan?
To secure a good mortgage interest rate, you will need to have an established credit record and at least two years on the job at the same company at a consistent pay rate.
Establish your credit by finding and using a secured credit card. This type of credit requires you to place a deposit against the card which equals your credit limit. Don’t be confused between a secured credit card and debit card; only the former will ensure that the company reports your good standing to the credit bureaus.
As you begin making timely payments on your new card, look to establish other lines of credit. Do not, however, create too many lines. Mortgage companies worry about a metric called your debt to income ratio. Too much debt will show you with an unbalanced credit health, and will make it difficult for you to secure good mortgage interest rates. A good rule of thumb is to never exceed 50 percent of your credit limit in charges on your credit clines and cards. This will help you achieve the highest credit score possible without a mortgage.
After two years on the job and a credit history of 18 at least months, it’s time to begin shopping for a mortgage!
What Are The Down Payment Requirements?
Place at least 20% of the purchase price down on the home you’re purchasing to receive the best mortgage rates from a commercial lender. I know what you’re thinking: this could be a significant amount of money for a young up-and-coming borrower. If you have the ability to save this sum in a short time…do it. This will secure low interest rates and create instant equity in your new property.
If you’re unable to save such a large amount in a short period of time, check out something called “mortgage insurance.” This type of insurance is offered by agencies such as the Federal Housing Authority (FHA), Veterans Administration (VA), Department of Agriculture (Farm Home), and occasionally even from private insurers.
Mortgage insurance allows you to place as little as 3.5% down on your home. Here’s why: the insurance policy states that the mortgage will be paid even if you default. Banks feel much more comfortable with this in place. However, there’s more good news about these programs. They allow for lower credit score qualifications, enabling more people to purchase homes.
As a last resort, you may also wish to consider borrowing money from family or friends for the large down payment. It should be noted that many banks now frown on this method for down payments. You will need to speak with your preferred lender to glean whether they’ll allow you to borrow money for a down payment.
How Much Loan You Can Afford? (Income Guidelines)
This is perhaps the most important thing a young borrower should understand. Your monthly mortgage payment should never exceed 33% of your monthly bring home pay. For example, if you bring home $3000 a month after taxes and insurance premiums, your mortgage payment should not exceed $990 per month. By keeping to this guideline, you should have enough budget room to easily afford your loan.
Many lenders will provide mortgages that are up to 40% of bring home pay. This creates risk for both the borrower and the lender. The average person needs at least 67% of their income to pay for living expenses and saving for their future. Once you pass this threshold, other areas of your life are certainly going to feel the weight of the mortgage.
The best thing you can do for your credit and lifestyle is to only purchase a home you can afford on your current salary. As your life develops, your career blossoms, and your need for a larger home increases, you can sell your current home and purchase one based on your new income and desires.
This information was provided by RefinanceMortgageRates.org. Click here for more information on mortgage, refinancing and housing.
“This is perhaps the most important thing a young borrower should understand. Your monthly mortgage payment should never exceed 33% of your monthly bring home pay.”
This is pretty standard rule of thumb. Personally, I would prefer a more stringent criteria, but that has to do with risk tolerance.
I forgot to say great post on the basics 🙂
I’m with Roshawn and say go less than 33%. I’m less than than 15%! Having that extra 18+% is amazing but I agree all people can’t do this. We were extremely lucky 🙂
I’m with Roshawn & Lance, 33% seems high. Dave Ramsey recommends 25% on a 15 year fixed (I realize not everybody likes his advice). Personally we are at about 18% and love having the extra margin. Our house is on the small end, but more than meets our needs and we know that the extra money we’re saving will make moving up to the house we really want all that much more affordable.
Call me old school, but I think 20% down should be a requirement. Nobody needs a house, although a lot of people want one. I’ve heard too many stories of people who buy their dream house and the payment is too high so they can’t afford to do anything outside their
dreamhouse.When I wen’t to get my pre-approval, the bank would have given me up to about 40% of my income, had I spent that I would be regretting it now.
Great points, David. Go above 33% at your own risk. If it were me? ….I’d look closer at 25% also. The sad news is that this guest post exposes the real issue: there are still too many people who would accept the 40% the banks will hand out.
Very well said post! I agree with the margin too but it’ll surely help if you can put more than 20% for the down payment if you can. If you have the funds, always pay your mortgage in advance or more than what you need to pay monthly and always have emergency funds that you can use in times of needs. Every mortgage owner should really apply your tips and I’m sure foreclosure problems won’t be so rampant after a few years.
Thank you for sharing. It’s very usefull. Hope to hear more from you.