So, you’ve decided it’s time to make the leap and buy a house. Congratulations! A home will likely be the most valuable asset you’ll ever own. However, whether it’s your first home or your 20th, you’re bound to experience some difficulties along the way. From navigating high interest rates to competing with cash buyers, here are three common home-buying challenges and how to overcome them.
1. Low Income
Many people are struggling to afford homes. Unfortunately, the average income rate is not keeping pace with inflation. Therefore, people who might have been able to afford a decent home just 10 years ago may now struggle to qualify for a mortgage. Low income is one of the most common problems new home-buyers face. But for many house hunters, it’s still possible to get into a decent house even if they’re in a low-income bracket.
It may be tempting to try to cheat the system and claim a higher income on your mortgage application documents. But doing so would be a big mistake. Lenders require borrowers to go through an income verification process. You’ll need to show proof of your income in the form of pay stubs, bank statements, or similar official documentation. If a lender discovers you lied about your earnings on your application, they’ll likely turn you down for a loan.
Fortunately, there are other solutions available for people with low income. You may qualify for a low-income loan or a down payment assistance program. Low-income home loans are specifically designed to level the mortgage playing field for buyers with low incomes. They often come with smaller down payment requirements, reduced closing costs, and competitive interest rates. There are also special mortgages available to veterans and first-time buyers.
2. High Interest Rates
High interest rates are another common problem house hunters currently face. The higher the interest rate, the more expensive the mortgage, and the less home you can afford. Imagine you could pay around $2,000 per month on a 30-year mortgage with no down payment. With a 3% interest rate, you could afford to borrow around $350,000. Your monthly payment would be around $2,000 with principal, interest, taxes, insurance, and private mortgage insurance included.
On the other hand, if the interest rate in the above scenario were 7% instead of 3%, your borrowing power would change significantly. Assuming all the other details above were the same but your interest rate went up, you’d only be able to borrow about $240,000. It would be much harder to find a decent home in that price range. That’s why your interest rate is so important. Use a mortgage calculator to figure out what your monthly payments will be based on your interest rate.
To get a good interest rate so you can afford a decent home, you may need to wait for rates to drop. They’re already on a downward trend, so get ready to pounce when they’re in a range you can afford. You should also shop around to find lenders that are offering the best interest rates on mortgage loans. You can qualify for the best interest rates available by maintaining an exceptional credit score. Keep in mind that competition becomes fiercer when interest rates drop, so you’ll need to move quickly once you find a house you want.
3. Poor Credit Score
What if you make a good income but your credit score is too low to qualify for a mortgage loan? In this scenario, buying a home may be challenging, but it’s not impossible. In many cases, lenders will approve borrowers with credit scores as low as 600. Government loans may have minimum credit score requirements as low as 500. However, if you’re approved with a score this low, you’ll most likely have a very high interest rate.
To get a reasonable interest rate despite your poor credit profile, consider applying with a co-borrower. A co-borrower is someone who applies with you for a loan. You’ll want to choose someone with a good income and credit profile to boost your eligibility. Your co-borrower will be responsible for making the mortgage payments if you can’t. Therefore, co-borrowing is a decision that should never be taken lightly.
If you can’t get a co-borrower, the next best way to qualify for good mortgage terms is to boost your credit score. Do this by making payments on time and paying down debt to improve your debt-to-income ratio. You should also review your credit report carefully to look for errors or inaccuracies that you can dispute. It can take months of good behavior to improve your credit score. So, if you plan to buy a house within the next year, start working on your credit now.
Today’s house hunters face many difficulties that can seem insurmountable at times. But in most cases, common challenges can be overcome with perseverance, patience, and knowledge. Whether you’re dealing with a low income, high mortgage interest rates, or a poor credit score, you have options. Use these tips to overcome common house-buying hurdles so you can finally get into a home of your own.