The Most Important Factor in Getting an Affordable Mortgage

Buying a new home involves lots of decisions for both the buyers and the mortgage lenders — and it all begins with financing.

Your main focus when buying a home should be securing a mortgage with low interest rates and a monthly payment that fits into your budget. To make it easier, experts recommend cleaning up your credit score before applying for a mortgage and saving up for a considerable down payment. 

But it’s not always clear how big your down payment should be. Traditionally, homebuyers hear they must be able to put 20% down, but depending on where you live and what kind of mortgage you get, you might not need that much.

Yet there’s still one major reason why experts recommend putting 20% down whenever you take out a conventional mortgage, according to Movement Mortgage loan officer Heidi Gage. This amount is the minimum requirement to avoid paying private mortgage insurance (PMI) — an extra premium that’s tacked onto your monthly mortgage to protect the lending company in case you default.

Below, we spoke with Gage to learn why you should consider putting down a larger down payment in addition to improving your credit score before applying for a mortgage. Gage also shares how mortgage lenders make their decisions so you know how much you should save when planning to buy a home.

A 20% down payment saves you from paying PMI on a conventional mortgage.

The Consumer Financial Protection Bureau (CFPB), warns that PMI is meant to protect the lender — not the buyer. From a lending perspective, a buyer who doesn’t put 20% toward their home puts more liability on the mortgage company since they are borrowing more money.

And unlike your mortgage bill, your monthly PMI payment never goes toward paying off the cost of your home. This means you’ll be paying more money each month but not getting any closer to paying your house off. 

Another helpful reason to save up for a larger down payment is to influence the size of your mortgage: “In essence, a bigger down payment may allow you to buy a higher priced home,” Gage tells CNBC Select.

The more equity you have in a home, the lower the risk for default.  This lower risk can then translate into a more favorable rate for the borrower. 

Gage explains that there are four main factors that mortgage lenders consider when you apply for a home loan — she calls them the “four Cs.”

They are 1) credit history and score; 2) collateral (type of property being secured); 3) cash (your down payment) and 4) capacity (how much debt you have versus income every month).

“Underwriters review the loan based on the above criteria, as well as layered risk factors,” explains Gage. If you have low capacity (meaning your debts are high and your income is stretched too thin), you could be denied a mortgage if you don’t have a…